Panel: "Keys to Coordination and Prosperity in the World"
Kristin Forbes - Council of Economic Advisers
Comments at the Japan-U.S. Forum in Tokyo
April 13, 2004
The United States and Japan are the two largest economies in
the world by a wide margin. Both countries have undergone a remarkable
economic transformation over the last century. At the end of the 19th
century, Japan and the United States each produced less output than India
or China. The Japanese economy was less than half the size of France.
Few observers predicted the future success of Japan and the United States.
For example, in 1881 the Japan Herald wrote:
"Wealthy we do not all think [Japan] will ever become: the
advantages conferred by nature
and the love of indolence and pleasure
of the people themselves, forbid it. The Japanese are a happy race,
and being content with little, are not likely to achieve much."
One key to the impressive development of both Japan and the United States
has been their interaction with the global economy, especially through trade.
Even the U.S.-Japan Treaty of Peace and Amity signed in 1854 foreshadowed this
importance of trade. One of the key components of the treaty was the opening
of two Japanese ports to American ships. My comments will therefore focus on
the importance of continuing to foster strong trade relations between the
United States and Japan, as well as the rest of the world.
The U.S.-Japan trade relationship has substantially evolved since
the signing of the Treaty of Peace and Amity. The initial treaty discussed
the exchange of wood and coal, and even the provision of water to supply U.S.
ships. Trade between the United States and Japan has since flourished; total
trade between the United States and Japan was about $170 billion in 2003.
These trade flows have supported growth in both nations and substantially
contributed to their current prosperity and success.
Over the last decade, economies such as China and India have emerged
as more important participants in the global trading system. Their
emergence increases the potential benefits from trade, but at times
can also increase the related tensions. For example, the rapid growth
in exports from countries such as China and India has increased
competition in some sectors in the United States and Japan-especially
in low-skill and labor-intensive sectors. Since many of these exports
are everyday items that are highly visible-such as dolls and sporting
goods-this has heightened concerns about job losses due to increased
trade with low-wage economies.
Although trade can negatively affect some companies, concerns about
trade are often overstated. For example, a large share of U.S. imports
from China is actually imports that used to come from other
countries-instead of being produced in the United States. In fact,
the share of U.S. imports from the Pacific Rim as a whole-including
China-has actually fallen since the mid-1990s. Therefore, the increase
in U.S. imports from China is more than made up for by decreased
imports from other countries in the region.
It is also important to remember that increased imports
from low-cost producers raise standards of living by providing
cheaper goods for consumers. A recent article provides several compelling
examples : lifting restrictions on imports of baby clothing saved U.S.
parents roughly $400 million in 2003, and the price of toys in the United
States at Christmas was 24 percent lower in 2003 than in 1997 due to
the elimination of tariffs. These types of gains to consumers from
trade were even evident in Japan after the signing of the Treaty of
Peace and Amity. Within two decades after the treaty was signed,
foreign interaction contributed to Japan's first bakery, photoshop,
telephone, beer brewery, and cinema.
The benefit of trading with emerging countries comes not only
through imports, but also increased exports to these rapidly growing
markets. Increased growth in emerging Asia offers a tremendous
opportunity. China and India currently have a combined population
of 2.3 billion. This is roughly 35 percent of the world's population.
These are vast, untapped markets. Higher standards of living in these
countries will substantially benefit the global economy. In fact,
we have already seen evidence of this potential benefit through
exports. Between 2000 and 2003, Japanese goods exports to China
increased by about 70 percent, and U.S. exports to China by about
75 percent. In contrast, Japanese and U.S. exports to the world
excluding China basically stagnated over the same period.
As the global economy continues to evolve, it will be critically
important to remember these substantial benefits from trade Maintaining
support for free trade, and especially support for breaking down
remaining trade barriers, however, can be difficult. Adjusting to
changes in trade patterns can cause painful transitions and job losses.
Some countries respond by adopting protectionist policies. Although
these sorts of policies may appear to help isolate a sector from
competition in the short-run, over time they inevitably harm
consumers and producers, reduce competitiveness, and slow growth.
There are several steps that governments can take to ensure that
we continue to receive the substantial benefits from free trade:
First, strongly encourage progress in global trade discussions
through the Doha Development Round. The greatest gains from increased
trade flows will occur if all countries around the world reduce
their barriers to trade. Granted, some of the largest remaining
barriers to free trade in countries such as Japan and the United
States are in politically-sensitive areas. This is why it is important
for Japan and the United States to show leadership in the global
trade talks by tackling these challenges, and setting an example
for other countries.
Second, respect the global trading system and work together
to enforce these rules. For example, one issue of concern in the
United States and Japan is the lack of respect for intellectual
property rights in some trading partners, such as China. It will be
important for developed economies to ensure that property rights are
respected. Countries will be most successful by working together
on these issues.
Third, take steps to improve growth and thereby job creation.
Raising and sustaining economic growth is the single-most effective
way to strengthen labor markets and reduce the concerns about job
security that drive concerns about trade. It is much easier to garner
support for trade when workers are less worried about their ability to
find a new job. The recent strong recovery in the United States, and
the start of a recovery in Japan, suggests that both countries have
made important progress in this area.
Fourth, adopt policies to ensure a flexible economy, such as
through deregulation. Increased economic flexibility allows countries
to better adapt as the global economy evolves, and more easily shift
resources to where they can most benefit from trade. President Bush
and Prime Minister Koizumi have taken an important step in this
direction through the Regulatory Reform Initiative, a part of the
U.S.-Japan Partnership for Growth. It will be important to continue
to make progress in deregulation.
Finally, ensure that workers have adequate skills in order
to adopt new technologies and succeed in new job opportunities.
It is especially important that workers can receive training so
that they can adapt to structural shifts in the economy resulting
from trade. For example, the U.S. government recently expanded Trade
Adjustment Assistance (TAA) which provides funding for training,
moving expenses, and health care costs after a job loss due to
international trade. Although no policy can fully remove the
difficulty and suffering for workers and their families when
they become unemployed, there is a role for government
to help ease the transition.
To conclude, the relationship between Japan and the United
States has gone through many ups and downs since Commodore Perry
pointed his guns at Edo Bay, but the trade and broader economic
relationship has recently flourished to the benefit of both nations.
It will be important to make further progress, breaking down
remaining barriers to trade around the world. The recent evolution
of trade patterns resulting from the rapid growth of China and India
only hint at the additional, substantial benefits to Japan, the
United States, and the rest of the world from further increases
in trade in the future.