As talks to conclude a Trans-Pacific Free Trade Agreement (TPP) have recently progressed , the question of whether Japan should be added to the present list of eleven (United States, Canada, Mexico, Peru, Chile, New Zealand, Australia, Singapore, Malaysia, Brunei, Vietnam) participants and thus of whether it can meet reasonable criteria for open markets has come to the fore. A major obstacle is the structure, practices, and industrial policies associated with the Japanese auto industry. It is perhaps the foremost example of what has become known as the "Closed Open Market" phenomenon. In technical terms the market is completely open with no tariffs or quotas. In reality, the Japanese market, with 6.6 percent, has the lowest penetration of imports and foreign brand autos of all the major auto markets, and this is almost exclusively in the very high price luxury segment. Indeed, Hyundai, the Korean auto maker that is currently perhaps the world?s most competitive producer, has abandoned the Japanese market on the grounds that its non-tariff barriers are so great as to make investment nothing but a waste of money and time. In terms of trade negotiations, this Closed Open Market phenomenon means that Japan can negotiate secure in the knowledge that no matter what formal concessions it makes, imports will not rise. In the particular instance of the TPP, this is all the more the case because the negotiating agenda does not cover the intervention in international currency markets, various investment subsidies, and anti-competitive market structures and practices that cause the major distortions of free market trade flows.
A long history explains this situation. In the 1920s-30s the Japanese auto industry was dominated by Ford and General Motors who between them had well over half the market. Ford produced locally with a factory in Yokohama. The Americans were expelled for political reasons in the mid-1930s and the market was taken over largely by Toyota and Nissan. After the war and the Occupation, Japan undertook to rebuild its industrial base without foreign investment and participation and prohibited Ford from repossessing its Yokohama plant. High tariffs were adopted and the auto industry was designated a strategic industry whose development was made a major objective of Japanese industrial targeting policy. It was built to be a major driver of Japan?s economic miracle, to be a major part of the export led growth strategy, and to repel entry by foreign producers. Most important in this regard was the large scale ownership and dominance of auto dealers by the primary producers. Selling cars requires dealers and if the dealers are all controlled by the producers, it is very difficult for new producers to enter the market. This has been demonstrated by the fact that despite Japan?s removal of all auto tariffs and quantitative restrictions in the 1970s and simplification of its homologation and regulatory procedures, imports have remained a miniscule part of the market.
Beyond the dealership and structural issues there are also the questions of exchange rates and currency manipulation and of industry targeting policies. Japan has historically been a frequent intervener in global currency markets as part of its export led growth policy to maintain an undervalued yen. In the wake of the 1985 Plaza agreement that resulted in a rising yen, the Japanese authorities reduced interest rates to virtually zero in an effort to keep the auto and other export industries competitive. More recently, after a long hiatus, Japan has again begun to intervene periodically in currency markets to counter a stronger yen.
It may be that free trade in autos is an impossible dream. For one thing, virtually every major government in the world has some kind of a special auto policy or has investments in its auto companies. Even the United States still owns part of General Motors and Japan is struggling to maintain employment in its biggest manufacturing sector and biggest employer while some European countries like France are actively trying to prevent reduction of production capacity and rationalization. For another thing, the industry is not the perfectly competitive industry on which free trade theory is precipitated and in which free trade is considered to be always win-win. Rather it is an imperfectly competitive industry characterized by oligopoly structures and often presenting zero sum rather than win-win outcomes.
Although the TPP is being touted as a "Twenty First Century" agreement, it is, in fact, nothing of the sort in terms of substance. The main drivers of globalization today are relative currency values, investment incentives and subsidies, anti-competitive practices and structures, and industry targeting policies both formal and informal. Because the TPP deals with none of these, it is largely irrelevant to the main game of globalization and certainly to the realities of the global auto industry and many other similar industries. If the TPP were concluded on its present basis and included Japan, it would inevitably result in an increase in the U.S. trade deficit and a decline in U.S. GDP growth as well as in U.S. employment while failing to achieve any increase in Japanese imports or anything like free trade.
Unless the proposed agreement can be recast to cover the major elements driving trade and to provide for affirmative action to counter old structures and practices, it should not include Japan and should probably not proceed at all. Download the report