Weekend Economists Debate: Which Came First? The Incredible, Edible Egg November 27-29, 2015

[Demeter]

26. SPEAKING OF JOKES: Japan Proves that “Fix Trade” Sales Pitch for TPP, TTIP, and TISA is Wrong

By Clive, an investment technology professional and Japanophile

http://www.nakedcapitalism.com/2015/11/japan-proves-that-fix-trade-sales-pitch-for-tpp-ttip-and-tisa-is-wrong.html

It’s raining acronyms – all with the stated aim of helping improve global trade.

Regular Naked Capitalism readers will need no introduction to the Trans-Pacific Partnership (TPP), described by the U.S. as “enhancing trade and investment, supporting jobs, economic growth and development” which sounds worthy enough but does suggest that trade needs some help.

Then there’s the Transatlantic Trade and Investment Partnership (TTIP) which promises that “Thanks to this agreement, Americans could find it a lot easier to sell goods and services to consumers in the European Union (EU)” suggesting that, without the T-TIP, things are a bit difficult at the moment.

Finally on our tour of Things Our Governments Are Doing to Help Us is the Trade in Services Agreement (TiSA), “which should further advance services liberalisation and regulatory disciplines.” I’ll confess that I’m not entirely certain how you advance services liberalisation but obviously the thinking is that “services” need “liberating”, although from what isn’t particularly well explained. However, cleverer minds than mine believe it is something worth doing.

Not one, then, but three different treaties or agreements are now required to help trade. Or are they? For these various initiatives, the common thread running through them all is that, like Mommy’s Little Helpers, they’re there to offer assistance to, presumably, meet a need that exists and is not currently being met. So the evidence for erratic, static or even declining trade should be – as a minimum – clear and – preferably – significant. But it is not. Just the opposite in fact and for the U.S. imports keep on growing, exports keep on growing and the flows are huge. Maybe in amongst all that international trade there are casualties and the cause of those casualties are barriers to trade of some description? You don’t need to look too hard to find casualties when it comes to international trade. There’s plenty of examples to go round. Let’s take a look at some of these examples and find out what’s going wrong.

I’ll concentrate on Japan because for historic reasons Japan is traditionally viewed as a country which is hard for non-domestic companies to find success in because of ill-defined but oft cited “barriers” to trade. Dragging Japan into participation in the TPP was seen by the US Trade Representative as being crucial because, under lobbying from U.S. interests, it was deemed to be a huge market just waiting for exploitation by these same interests, but they were prevented from doing so because of Japan’s unfair restrictions on trade. While reading these tales of woe, keep in mind one thing that even the dumbest MBA flunker would be expected to know. Enterprises should only ever consider expending outside their home market into overseas territories if:

• they have an unquestionable competitive advantage

and

• that competitive advantage can also be replicated in the overseas county

Both factors must be in place. It is obviously silly to attempt to start operations overseas if you are uncompetitive in your home country. But even if you are successful in your home market, whatever has made you successful must also be applicable in the new overseas market. If you rely on buying politicians, getting tax breaks, financial engineering, implicit or explicit government support, being a state-tolerated monopoly, practicing dubious treatment of suppliers or labour, being responsible for tolerated or covered-up environmental degradation or suchlike, then you are not running a successful enterprise, you are running a looting operation targeting your country of origin. It will be very difficult to recreate those sort of pre-requisites for your business to succeed elsewhere. Regulations may be tougher. Enforcement may be less compromised. You won’t know the culture so you won’t know who to buy favours from, when and for how much. And local competition may be doing all this already and won’t want you muscling in so will try to thwart you.

Example 1: U.S. Too Big to Fail Bank Citi Fails in Japan’s Retail Banking Market

Example 2: When the Going Gets Tough, RBS Gets Going (out of the country)

TBTF is the single biggest impediment to increasing trade in financial services. And the TPP does nothing at all about it...Enough of financial markets. They are opaque which is a feature not a bug, so let’s move on to something simpler. There is, superficially, nothing simpler than general merchandise or grocery retailing and it is from that sector that we can look at our next example of a company which crashed and burned but again for reasons which have little to do with tariffs, regulations or restrictive practices in Japan.

Example 3: Britain’s Tesco Recreates its (not so) Wonderful Product and Service Offer in Japan, Japanese Shoppers Ask “What Have We Done to Deserve This?”



In summary, then, there is little available evidence to support the hypothesis that, absent the TPP, trade with Japan is somehow being strangled. On the contrary, our lessons from Japan have shown that:

• In financial services there are no barriers to entry for foreign competitors in the Japanese retail banking market and the Citi example demonstrates that you cannot polish a turd. Breaking into a new territory requires a compelling product and/or service offer or a combination of time, patience and money. No “trade agreement” such as the TPP can provide enterprises with any of these things. The private sector must be willing to develop that which will give a competitive advantage and then stay the course while they establish themselves in their target country. Blaming non-existent regulatory burdens is not a good enough excuse.

• Competition is, however, definitely stifled by zombie companies propped up for no good reason by government support, either tacit or overt. RBS was only able to participate in the trade in fixed income securities when it was implicitly backstopped by the taxpayer. Once taxpayer support ended, RBS had to quit the fixed income market in Japan. This was a correct outcome and should be encouraged. But the TPP does nothing to end the problem of Too Big to Fail institutions which distort the competitive environment.

• Even if a market is being influenced by the presence of regulation, such as Japan’s retail sector was presumed to be with the Large-Scale Retail Stores Law, removal of such regulations does not necessarily result in the outcomes that those agents pressing for the removal (usually those who are hoping that deregulation will be to their advantage) seek. Deregulation of the Large-Scale Retail Stores Law only weakly, if at all, increased total trade and any such increase was dwarfed by overall – and unrelated – changes in the wider economy such as demographics and the participation of women in the workplace. The TPP would not force Japanese consumers to suddenly start switching their preference from quality and service to price sensitivity. If, say, U.S. companies want to compete in the Japanese market, do they really have the ability to provide what the market has, repeatedly, shown that it wants? If not, no amount of TPP “help” is going to increase trade.

Could it be that instead of Japan having barriers to trade which the TPP is supposed to remove, U.S. (and other western) companies have simply lost the ability to compete?

Another explanation is that, as we have previously stated http://www.nakedcapitalism.com/2015/11/the-tpp-is-a-multi-dimensional-simultaneous-equation.html the TPP is nothing but kayfabe covering moves to establish a regional security treaty without scaring China. But while China is many things, stupid isn’t one of them.