Kan May Put Free-Trade Talks on Hold After Quake in Setback for Obama Goal

Japan’s strongest-ever earthquake may derail Prime Minister Naoto Kan’s push to join U.S.-led trade talks after the resulting tsunami devastated farmers.

Kan had set a June deadline to decide on whether to join the talks toward slashing some of the world’s highest agricultural duties, including a 778 percent tariff on rice. Two lawmakers from Kan’s ruling Democratic Party of Japan said the Trans-Pacific Partnership is off the table for now as the government focuses on quake victims and the nuclear crisis.

Failure to pursue a trade deal may hinder companies such as Mitsubishi Corp. and Toyota Motor Corp. in competing overseas and set back Kan’s efforts to modernize Japan’s economy. President Barack Obama aims to wrap up a U.S.-South Korea trade deal before July while attempting to build the nine-country TPP into an Asia-wide pact.

“Corporate Japan is really pushing, as they know Japan’s failure to enter the TPP would be a further step towards second- or third rate nationhood on the global stage,” said Jesper Koll, head of equity research at JPMorgan & Co. in Tokyo. “Changing agriculture policy faces big opposition.”

Urging Caution

About 100 members of Kan’s party signed a statement in October urging caution on the trade talks, reflecting the political power of the country’s 2.5 million farming households. The area devastated on March 11 by the 9.0-magnitude earthquake and subsequent tsunami accounts for more than a quarter of the country’s rice production, government figures show.

“The Japanese have sympathy for those who had damage in rural areas,” said Masayoshi Honma, a lecturer on agriculture policy at the University of Tokyo who supports the accord. “It’s not the right time to talk.”

Japanese farmers derive 47 percent of their revenue on average from subsidies, price supports and restrictions on imports, according to the Paris-based Organization for Economic Cooperation and Development. That compares with 10 percent for the U.S. and 24 percent for the European Union.

Japan’s support for farmers totaled $46.5 billion in 2009, according to the latest available data from the OECD. The comparable figure for the U.S., with a population more than twice Japan’s, was $30.6 billion.

Diet Staple

Rice is the staple of the traditional Japanese diet and until the late 19th century was the basic measure of wealth. The word for “meal” is “cooked rice.” The world’s first futures market was Osaka’s Dojima rice market in the early 18th century.

Agriculture Minister Michihiko Kano on March 22 announced a delay in forging plans to bolster the farm sector to withstand foreign competition, a prerequisite to join the TPP. It would be “considerably difficult” for Kan to stick with his June deadline, DPJ lawmaker Isao Matsumiya said by phone.

“All that talk has been completely wiped out,” fellow ruling party legislator Hiroshi Kawauchi said about the TPP.

Kan’s administration has hinted at a delay without formally announcing one. Staying out now doesn’t preclude Japan from joining later, said Jeffrey Schott, a fellow at the Peterson Institute for International Economics in Washington.

‘Without Regard’

“The global trend toward free trade is proceeding without regard to the situation in Japan,” Chief Cabinet Secretary Yukio Edano said today in Tokyo when asked about the government’s position on the TPP. “Right now we’re focusing all our efforts on the earthquake and nuclear power plant situation. We have to assess the entire damage before making any political decisions on our agenda.”

Kan’s DPJ ousted the Liberal Democratic Party 18 months ago after more than 50 years of almost unbroken control. The LDP for years imposed protective tariffs to win the support of the Japan Agriculture Cooperatives Group, the country’s dominant distributor of rice and vegetables.

The group postponed rallies set for this month and next opposing the trade accord and farm policy changes because of the disaster, spokeswoman Eriko Narikiyo said by phone.

‘Bite the Bullet’

“You can’t have a TPP or a U.S.-Japan FTA unless you bite the bullet on agricultural reform, and they’re not even close to doing that,” said Gerald Curtis, a professor of Japanese politics at Columbia University in New York.

Besides the U.S., the TPP includes Singapore, Brunei, Malaysia, Vietnam, Australia, New Zealand, Chile and Peru -- an eight-country grouping with a combined gross domestic product about a third the size of Japan’s. Adding Asia’s second-biggest economy would make the TPP the U.S.’s biggest free trade area by GDP, topping the North American Free Trade Agreement.

The sixth round of talks is set for March 28 in Singapore.

“As some degree of normalcy returns, we will of course re- engage with Japan as it makes important decisions on the economic and trade policies it will pursue in the wake of this tragedy,” Carol Guthrie, a spokeswoman for the Office of the U.S. Trade Representative, said in an e-mail.

Goods trade with Japan reached $181 billion last year, or 5.7 percent of the U.S.’s global commerce in goods, according to the Commerce Department. Obama, aiming to double exports in five years, will discuss the deal at November’s Asia-Pacific Economic Cooperation meeting in Hawaii.

‘Restore Japan’

Nippon Keidanren, a Tokyo-based business group representing more than 1,200 companies, said in a Dec. 6 report the government should join the TPP “in order to restore Japan.” The group’s members include Mitsubishi, the country’s biggest industrial supplier, Takeda Pharmaceutical Co., Asia’s largest drugmaker, and Toyota, the world’s biggest carmaker.

Kan is struggling to jumpstart an economy burdened by deflation, rising social welfare costs and the world’s largest public debt at more than 200 percent of gross domestic product.

Fewer than one voter in four supported Kan’s government in a poll a week before the earthquake by Yomiuri newspaper.

The disaster gives him an opportunity to redeem himself in the eyes of the public and push through farm subsidy changes down the road, said Shujiro Urata, a professor of economics at Waseda University in Tokyo and a former World Bank economist.

“He has a better chance now than before the earthquake,” Urata said. “If he can use this opportunity to regain popularity and support, then he has a very good chance of pushing through the TPP and other reforms.”

To contact the reporter on this story: Daniel Ten Kate in Bangkok at dtenkate@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg in Hong Kong at phirschberg@bloomberg.net

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