The World Economy and the Future of Growth and Trade
Growth and competitiveness represent challenges for both Japan and the European Union. Japan, still struggling to emerge from twenty years of economic stagnation, is coping with an aging population and equivalent declines in productivity and domestic demand. The European Union, meanwhile, is combating a wave of populism propelled by the belief that the benefits of globalization have been unevenly distributed. And a rising tide of protectionism – coming in large part from the Trump Administration in the United States – poses a significant threat to both. The 3rd JEF-DGAP international symposium examined how Japan and the EU can face these challenges individually and together. For Japan, it will be essential to spur investment in domestic capacity and make up the productivity lost by older generations of workers leaving the workforce. For the EU, the first priority must be building an infrastructure and regulatory environment that are attractive in a data-based economy. Both Japan and the EU need to provide more support for innovation and SMEs, and to work together to preserve international trade in the face of those who would re-write the rules.
Barriers to Growth
Growth has been slow or stagnant in both the European Union and Japan. The Japanese economy only escaped deflation in 2013 after the Bank of Japan intervened, and even now growth is constrained by demographic factors. With a population shrinking by roughly one percent per year, Japan’s growth is capped at a maximum of 0.5 percent. In the European Union, insufficient investment in infrastructure (especially IT infrastructure), slow EU integration, and the eurocrisis have handicapped progress.
The discussion suggested several measures to address these concerns. In Japan, immigration reform could help reduce the impact of population decline, increasing both productivity and domestic consumption. At the same time, the government could take steps to both encourage domestic investment and make the labor market more flexible.
In the European Union, concerns over privacy and data security need to be weighed against Europe’s need to stay competitive with IT firms in the United States and China. Member states also need to invest more money in both IT infrastructure and research and development while deepening European integration in the digital and industrial sectors.
Trade and Protectionism
The election of Emmanuel Macron in France may have slowed the march of the populists in Europe, but there is still significant risk that anti-trade forces will undermine the foundation of the international economic order. Despite rhetoric to the contrary, China’s government has maintained significant barriers to international markets. And in the US, the Trump Administration has already withdrawn from the Trans-Pacific Partnership and indicated it will not necessarily abide by WTO rulings.
To counter this trend, the discussion recommended several steps. First, the EU and Japan can work together to provide a bulwark in defense of free trade, deepening their trading relationship even as the US closes its borders and China continues to make things difficult for foreign investors. Japanese Prime Minister Shinzo Abe already signaled his interest in quickly reaching an Japanese-EU free trade agreement during his trip to Germany in March.
Second, governments and NGOs can do more to inform voters about the benefits of free trade to counter voter hostility. One clear problem during the run-up to the Brexit vote was that many in Britain did not fully understand their country’s relationship with the EU or the consequences of withdrawing from the union; NGOs and research organizations must take it upon themselves to clarify these issues.
Productivity through Digitalization
Finally, as the EU and Japan do more to encourage digital enterprise, they should learn from their previous mistakes. Digitalization will increase productivity, but at the cost of millions of jobs. It will be essential to take steps to ensure that this process does not result in increased inequality, and that new opportunities are available to the workers whose jobs are replaced.
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