Obama's Failed Asian Pivot

Behind the veil of reassuring Asian allies about Washington's attention, an agreement with Japan to forge ahead with the 12-nation free-trade Trans-Pacific Partnership (TPP) was easily the most important item on President Obama's tour of East Asia.

The stakes were so high and the negotiating dynamics so intense that American and Japanese trade officials were given extra time to come up with a deal until Mr. Obama had to leave Tokyo for his flight to Seoul.

Apparently, some progress was made but there was no agreement.

What happened?

Strangely enough, the Japanese did not think that their unwillingness to open up their farm and automobile sectors were the main stumbling blocks. During last Friday's press conference, Japan's Finance Minister Taro Aso said that the problem was a lack of consensus on the American side, and that any agreement was unlikely until after the mid-term Congressional elections next November.

Implicit in Tokyo's view is the Japanese refusal to make the necessary concessions because they thought Mr. Obama could not get a fast-track negotiating authority to conclude the TPP agreement covering the 12 countries (U.S., Japan, Brunei, Malaysia, Vietnam, Singapore, Australia, New Zealand, Canada, Mexico, Chile and Peru) that are estimated to account for 40 percent of world trade and for 60 percent of American exports.

I wonder whether American diplomats knew about all that before Mr. Obama went to Tokyo.

At any rate, the danger now is that the TPP and Washington's similar project of a free-trade agreement with the E.U. (Trans-Atlantic Free Trade Agreement – TAFTA) may unravel. America's forthcoming presidential election cycle will soon be in full swing, and the next U.S. administration won't be ready to take up these issues until sometime in 2017 -- assuming that Asians and Europeans were still interested.

For Japan, however, the economic consequences of forgoing structural reforms inherent in a more open trading system could be serious. The TPP was seen as an impetus to competitive markets at home and a tariff-free access for Japanese exporters to a region that is home to nearly half of the world's population.

Prospects of increasing export sales are of vital importance at a time when Japan's foreign trade is becoming a drag on economic growth. Last year, for example, the negative trade balance took 0.3 percent off the Japanese gross domestic product (GDP), and the trade deficit in the first quarter of this year nearly doubled from the year before.

Japan's domestic demand is also likely to continue to weaken. Real wages in the first two months of this year declined 1.5 percent from the year earlier, and the households' real purchasing power will be significantly eroded by stagnant wages, rapidly rising inflation and higher taxes.

Without a sustained pressure to open up its economy in a free-trade environment, it is difficult to see how the Japanese government could initiate and complete meaningful structural reforms that would go against deeply entrenched vested interests and powerful political constituencies.

It, therefore, seems that the changing structure of an opening Japanese economy – the "third arrow" of the government's economic program – is at best a very long shot. As so many times in the past, it will be much easier for Japan to rely on a tried and tested expedient of more monetary creation, weaker yen and a renewed export push.

CNBC