How a Great Power Falls Apart
Decline Is Invisible From the Inside
In the aftermath of World War II, American policymakers understood that a prosperous Japan anchored in a U.S.-led economic order would be in the United States’ interest, since it could help support forward-deployed U.S. forces and counter the Soviet Union’s influence. For that reason, the United States supported Japan’s postwar recovery, developing a relationship with Tokyo grounded in economic and security cooperation. But the United States eventually became a victim of that policy’s success. As Japan’s economy grew, its companies gained market share at the expense of American producers. Sheltered under the U.S. security umbrella, Japan became an economic rival.
For nearly 50 years, Washington has struggled with this dynamic, which one could call the “allies and competitors” problem. Every U.S. administration has had to balance maintaining a close political and security relationship with Japan and preserving fair economic ties.
U.S. President Donald Trump will start writing the next chapter in this history when he meets with Japanese Prime Minister Shinzo Abe on February 10 and 11. The Trump-Abe meeting is perhaps the most important encounter between Japanese and U.S. leaders in more than two decades. Tokyo wonders whether the new president will follow through on his longtime criticisms of Japan’s “taking advantage” of the United States, perhaps by seeking to reduce the U.S. trade deficit with Japan and by pushing for Japan to increase its defense spending.
Trump would not be the first president to prioritize fixing the U.S. trade deficit with Japan.
Trump’s decision to withdraw the United States from the Trans-Pacific Partnership (TPP), a landmark agreement in the U.S.-Japanese economic relationship, has already indicated that his approach to Japan will differ from those of Presidents Barack Obama and George W. Bush, who believed that the United States and Japan shared not only security and economic interests but also common values. Japan’s trade surplus with the United States was of little concern to Trump’s two most recent predecessors; more important was U.S. support for the revival of the Japanese economy after the slump of the 1990s. Trump, Commerce Secretary-designate Wilbur Ross, and National Trade Council Chair Peter Navarro have all suggested that the new administration will take a tougher approach to the economic relationship, using negotiations, in Ross’ and Navarro’s words, to “increase the GDP growth rate, decrease the trade deficit, and strengthen the U.S. manufacturing base.”
Such an approach does not have to upend the U.S.-Japanese relationship. Previous U.S. administrations have sought to change the terms of trade between the United States and Japan without doing so. Washington should heed their lessons.
If the Trump administration is determined to take a hard-nosed approach to the trade deficit with Japan, it would do well to study the Ronald Reagan administration’s compartmentalization of the United States’ security and economic relationships with Tokyo—and its avoidance of using the security relationship to gain leverage in economic negotiations. Under pressure from Congress, Reagan pursued an aggressive trade policy with Japan. But his administration also viewed Japan as an important ally against the Soviet Union and therefore played down U.S. demands for especially punitive trade remedies, seeking to leverage the so-called Ron-Yasu relationship—Reagan’s relationship with Japanese Prime Minister Yasuhiro Nakasone—to win concessions from Japan. Although some critics, including Trump, accused the Reagan administration of letting Japan off the hook, this approach nevertheless ensured that attempts to reshape Washington’s economic ties with Japan did not damage the two countries’ security partnership.
Today, Washington and Tokyo share concerns about China’s strategic expansion that in some ways mirror their concerns about the Soviet Union during the Cold War. Thanks in part to Abe’s efforts to upgrade Japan’s contribution to its alliance with the United States (by, for example, expanding the potential roles of Japan’s Self-Defense Forces), the partnership between the two countries has become a stronger tool for pushing back against Beijing. Japan is a willing U.S. partner in a strategically vital region: working closely with it benefits the United States’ national security. For example, the country's willingness to host U.S. forces, including the only U.S. aircraft carrier based outside of the United States, has helped equip Washington for potential crises in the area, and deeper cooperation between the U.S. military and Japan’s Self-Defense Forces has strengthened their deterrence against China in the East China Sea, where Beijing has pressed its claims to the Japanese-administered Senkaku (or Diaoyu) Islands.
Secretary of Defense James Mattis’ remarks during his visit to Japan earlier this month suggested that the Trump administration recognizes the importance of Japan as a security partner and may be willing to insulate the alliance from economic friction. But it may take a firm commitment from the president himself to reassure Japan that the security relationship will be shielded from possible differences over trade.
Trade problems do not diminish the many areas in which the United States and Japan share economic interests.
The administration should also recognize that any perceived trade problems do not diminish the many areas in which the United States and Japan share economic interests. Like the United States, Japan’s industrial base has been hollowed out, as manufacturers have shifted production to China and other emerging markets in Asia (and to the United States). Tokyo shares some of Washington’s concerns about Chinese trading practices, including intellectual property theft, export subsidies, restrictions on foreign direct investment, and currency manipulation. Japan may be even more vulnerable than the United States to China’s plans to move Chinese manufacturing up the value chain, since China is targeting sectors in which Japan is particularly strong, including advanced manufacturing and robotics, green technology, and railway technology. What is more, the United States and Japan have a shared interest in supporting the development of the middle-income countries of Southeast Asia, so as to limit their dependence on China and prevent China’s standards from prevailing in the race to shape regional governance. The administration should consider establishing a venue–perhaps a strategic and economic dialogue—that can address those shared interests and ease friction over trade.
Washington should have realistic expectations about what it can achieve when it comes to shrinking the U.S. trade deficit with Japan, however. The Reagan, George H. W. Bush, and Clinton administrations all made reducing the trade deficit a priority, and despite using a number of tools to protect U.S. producers and open Japanese markets, the deficit remained. The Trump administration could be similarly frustrated.
The good news is that the trade deficit with Japan has some silver linings. It means, for example, that Japan is one of the U.S. economy’s crucial creditors, and that Tokyo, not Beijing, is the largest holder of U.S. government debt. Japanese companies have the second-largest stock of foreign direct investment in the United States after British firms, and as of 2013, Japanese investors held more than $1 trillion in U.S. financial assets. Japanese companies have become major manufacturing employers in the United States.
If there is one thing in U.S.-Japanese relations that nearly every U.S. administration has complained about, it has been that Japanese governments have been either too short-lived or too cautious to pursue the security or the economic policy changes that Washington has wanted. The sources of many of those frustrations still exist. Japan’s agricultural lobby remains a capable force; Japan’s exporters, including its automakers, have substantial political clout; and although the public has some interest in structural reforms and economic openness, its appetite for them is limited. On the other hand, the political climate in Japan now favors the United States more than it has in the past. Abe’s government is stable and popular, and the prime minister is determined to revitalize Japan’s economy and carve out a more ambitious role for Japan in Asian security. He has demonstrated a willingness to use his political capital to strengthen the security relationship with the United States, and his commitment to TPP demonstrated his interest in greater economic openness given the right framework. He appears eager to build a strong, personal relationship with Trump.
The prime minister’s political capital is not inexhaustible, however, and if Washington tries to force Abe’s government to accept a one-sided free trade agreement, he could face backlash at home—especially after he staked so much political capital on the TPP only to have the United States withdraw from the agreement. If the Trump administration is interested in a bilateral free-trade deal with Japan, it will have to recognize the political limits on Abe and try to forge a mutually beneficial pact. Japan, for example, will find it difficult to accept binding rules on what Trump has described as currency manipulation, for fear that they would restrict the independence of its monetary policy. It will also be difficult for Abe to make concessions on agricultural imports beyond what Japan accepted in the TPP or to give U.S. automakers a more generous deal than they received in that pact, which included a 30-year phase-out of the United States’ 25 percent tariff on Japanese mid-size trucks and a 25-year phase-out of the 2.5 percent U.S. tariff on Japanese cars and light trucks.
As U.S. policymakers have recognized since the end of World War II—and as they have come to appreciate again as Japan has struggled to restart growth after its lost decades—a strong Japanese economy is good for the United States, and a weak one offers a smaller market for U.S. producers and a diminished voice in Asia.
The early signals from the Trump administration suggest that its approach to Japan will not necessarily break radically from those of other administrations. Trump would not be the first president to prioritize fixing the U.S. trade deficit with Japan, nor will he be the first to want Japan to contribute more to the alliance.
The “allies and competitors” problem may be back, but that does not mean it cannot be successfully managed. Whether that happens depends on the extent to which the Trump administration emphasizes Japan’s status as an economic rival over its role as a security partner that shares important economic interests with Washington. If the administration is willing to work with Japan to boost growth in both countries and accept a reduced but not entirely eliminated trade deficit, Japan and the United States could benefit substantially. But if the United States leans too hard on Japan for economic concessions—and perhaps also pushes it too far to contribute more to hosting U.S. forces or to further boost its defense spending—it should not assume that Tokyo will accept its demands. Even though a close relationship with the United States is Japan’s first choice, Japan can say no in trade talks with the United States if it thinks the costs of a deal are too high, as it did during the Clinton administration. Were Tokyo to do so today, it would have little choice but to work with other regional powers—perhaps even China—to build a new Asian order that would exclude the United States, to Washington’s detriment.