[Feature: The Future of Free Trade] Roundtable Discussion: How Will the World Confront Protectionism?

Thank you all for joining us today. Today, I would like to discuss the theme of "The Future of Free Trade."

Since President Trump took office, protectionist movements have spread, significantly impacting the global economy. At the recent G7 summit, the gap between the U.S. and other advanced nations regarding trade policy deepened, and trade frictions between the U.S. and China are also intensifying, making for a situation we cannot take our eyes off of. Today, as "free trade," which has been spoken of with positive value for many years, appears to be wavering, I hope we can consider the current situation and its future from a historical perspective.

First, I would like to talk about the historical trends surrounding free trade and protectionism from the 19th century to the early 20th century. The period from the 19th century until the outbreak of World War I—roughly from the end of the Napoleonic Wars to the Belle Époque—is called the first era of globalization. There were two factors for globalization: one was the reduction in transportation costs, namely the development of steamships and railroads. The other was the progress of free trade, as the ideals of free trade spread from Britain to the European continent in the latter half of the 19th century.

Britain moved to abolish the Corn Laws and the Navigation Acts, which were the pillars of protectionist trade. Against that background, major tariff reforms were implemented, abolishing import duties on 750 items and steering toward free trade. That trend then spread to the European continent.

From 1873 to 1896, a depression occurred, centered on Britain and the U.S., and in the 1890s, there was a movement back from free trade toward protectionism. Following this depression, Western nations, including the United States, began to oscillate between free trade and protectionism. I believe such movements have aspects that resonate with today. Specifically, it is a structure where domestic industries exposed to competition from imported products call for protection, while industries that benefit from exports promote free trade.

Furthermore, entering the 20th century, the New York stock market crash occurred in 1929, and unemployment expanded in various countries. Around the same time, Japan lifted the gold embargo and fell into a serious deflation. Against the backdrop of the Great Depression, international trade shrank rapidly.

One factor in the contraction of trade was that countries moved toward protectionism. In other words, they raised tariffs to protect domestic industries. In the United States, which had become the hegemonic power, the Smoot-Hawley Act was enacted in 1930, raising tariffs on imports to record levels. European countries followed suit, leading to the formation of economic blocs.

I think the tendency for countries to move toward protection to avoid competition for their own products has aspects that resonate with the modern era. However, while the economies of various countries faced a depression after the Great Depression, a major difference is that at least the current U.S. economy is doing well and the unemployment rate is falling.

In any case, based on the reflection that the economic bloc policies of various countries were one of the remote causes that led to World War II, the Bretton Woods Agreement was signed at the end of the war to ensure currency stability and promote free trade. Furthermore, in the post-war period, the GATT (General Agreement on Tariffs and Trade) was concluded. Mr. Fukasaku, could you please speak about the post-war movements from around that point?

I began serving at the GATT Secretariat in April 1983 and was there for about seven and a half years. The WTO (World Trade Organization, established in 1995) was established by reorganizing and developing the GATT. While the GATT was an international agreement, the WTO is an international organization granted legal personality by the Marrakesh Agreement.

It is first necessary to understand that the WTO is a unique organization, different from the IMF, the World Bank, or the UN. Regarding WTO decisions, its member countries bear "contractual obligations." On the other hand, other international organizations differ in that they only encourage maximum effort from their member countries.

Bob Dole, who was a U.S. presidential candidate, said, "The WTO has teeth for the first time." The GATT did not have that. In the WTO, panel reports and Appellate Body reports issued during dispute settlements are automatically adopted unless there is a negative consensus. The U.S. took the lead in creating the WTO, but in hindsight, it realized that there was a possibility it could harm its own national interests. Countries like the U.S. dislike international organizations if they become too strong because they become impossible to control.

I will briefly mention the WTO negotiations. For about six years from the first meeting in 1995 until the Ministerial Declaration in Doha in 2001, there were various failures. Finally, in 2001, the Ministerial Declaration was agreed upon in Doha, and from here, the so-called Doha Round—multilateral negotiations based on the Doha Development Agenda (DDA)—began.

Even at the stage prior to the DDA, the WTO made quite important decisions. For example, it adopted a Ministerial Declaration on the Information Technology Agreement, deciding to eliminate tariffs on information technology-related products. Subsequent Doha Round negotiations were a cycle of negotiating and failing, but finally, at the 8th Ministerial Conference in December 2011, a shift was made to a new approach that allowed for partial agreements, and significant results were achieved at the 9th and 10th Ministerial Conferences.

As for why the DDA drifted for about ten years during that time, it was because advanced nations acquired other tools, such as concluding FTAs (Free Trade Agreements) outside of the WTO. Furthermore, the idea of a "grand bargain" between advanced and developing countries, as seen in agriculture and manufacturing negotiations, stopped functioning. Additionally—and this is important—what constitutes the best trade policy for developing countries differs from country to country. Developing countries are not uniform.

Finally, though this is not often said, what I think is important is that there is no incentive to conclude the DDA negotiations. In the Uruguay Round (1986–94), there was a strong incentive to conclude negotiations and create the WTO. However, there is none this time.

Furthermore, since it is an extremely difficult task for 164 member countries to negotiate and reach a single undertaking, it ended up becoming partial agreements. Therefore, the outcomes of the round inevitably have to be low.

My perception is that the WTO as an international organization stands at a major crossroads due to the failure of the 11th Ministerial Conference in December 2017, and I hope to speak about that later.

Following the discussion so far, Mr. Wakasugi, how do you view these trends in the global economy?

Looking back at the post-war global economy, growth and the expansion of trade have been realized with a synergistic effect over a fairly long period. I believe the background to this was the support of a firm ideology under the Bretton Woods system that free trade is important.

I think the 1960s and early 70s were a very good era when free trade was expanding rapidly. After that, as a result of the oil shocks, economic growth declined, centered on advanced nations. When that happens, protectionist trends inevitably begin to emerge.

As a result of the oil shocks, changes in industrial structure brought about major changes in the economic structures of various countries, creating countries that could adapt and those that could not, and trade friction between the two became very large. There, a consensus was born that intensified trade disputes should be overcome based on international rules, and the WTO was created through the Uruguay Round.

What became visible in this process is that free trade is a benefit for the economy as a whole. However, it does not necessarily mean that everyone benefits equally; there are winners and there are losers. Simultaneously with the expansion of free trade, anti-free trade and protectionism sometimes emerge from the side that suffers disadvantages.

It is possible for friction to expand if trade expands, but I believe that until now, many countries have understood that free trade brings benefits as a whole, based on the bitter lessons of the pre-war period, and have managed to control protectionism somehow.

However, at this point, unfortunately, I think it cannot be denied that those opposed to free trade are beginning to influence policy in the U.S. Trump administration. It is very concerning that we have entered an era swinging toward protectionism.

Earlier, Mr. Kiyota spoke about the Smoot-Hawley Act. At that time, economic conditions were very poor, and protectionist trade began with the protection of farmers suffering from falling agricultural prices. However, it did not stop at agricultural protection but spread to the protection of industrial goods, and a retaliatory battle of tariff hikes began between the U.S. and Europe.

What is different now is that despite the U.S. economy being good, protectionist movements that do not benefit the whole are occurring politically. I believe we have reached a very important phase in how to control protectionism.

Mr. Fujiyama, you have extensive experience in overseas business. What are your thoughts on the current situation surrounding free trade?

When you are at a trading company, there was always a sense that free trade serves the national interest in terms of securing energy and resources, as well as securing free export markets. I recognize that free trade is extremely important for Japan.

However, of course, depending on the country and the situation, there is always the temptation of protectionism, such as the fixation of a monoculture-type production structure, or even for relatively competitive countries, issues of food and energy security.

Furthermore, there is the idea of providing temporary protection to industries that one aims to turn into growth industries. General trading companies basically advocate for free trade, but in fact, we sometimes seize business opportunities in situations where protectionism is about to emerge or when shifting from protectionism to free trade, so I was watching those sensations with a very sharp eye.

Free trade is something claimed by those who have relatively competitive industries because it leads to their own national interest, so the U.S. also becomes a champion of free trade when it judges its competitiveness to be strong. However, this time, while the U.S. is speaking of very classical protectionism, the big problem is that it does not seem to be preparing domestic industrial policies sufficient to convert into competitive industries.

On the other hand, China is thinking about the issues of liberalization and protectionism within a long historical span. Seizing the timing when the Trump administration brought out protectionism, they have begun making statements as if they are the champions promoting free trade while promoting the "Belt and Road Initiative," which is an interesting situation.

I believe it is not just free trade that is wavering, but the thesis of market principles itself that is wavering today. The three elements that create the modern era—science and technology, market principles, and democracy—have created globalism over the past 300 years while being intricately intertwined. I think we must position and consider the "wavering of free trade" within the context of the wavering of the norms of globalism itself.

Mr. Takita, you have covered the United States as a reporter for many years.

What remains impressive to me from my time as a reporter are the changes in the world since the 1990s. The Berlin Wall fell in 1989, and I think globalization since the 1990s has a strong coloring of Pax Americana (U.S. hegemony) Part 2.

I think it is significant that since the 90s, the U.S. created a system to successfully control both goods and finance. Technological progress, including IT, also created mechanisms convenient for the U.S. Furthermore, like the Wall Street-Washington Complex, they also remodeled the decision-making mechanisms.

On the other hand, China also made joining the WTO one of its goals and has existed as a beneficiary of it.

So, if we ask what the relationship between the U.S. and China was like, it might have been a relationship like "a cracked pot with a mended lid." A typical example is the U.S.-China relationship in the 2000s, prior to the Lehman shock. A housing bubble occurred in the U.S., personal consumption became very active, and the U.S. economy was revitalized by consumption. It was China, having entered the WTO, that was able to actively export the things those Americans consumed.

In other words, in the first half of the 2000s, I think the relationship between the U.S.-led revitalization of the global economy and China, which achieved an economic take-off by supplying goods there, was a mirror image.

Furthermore, what is important is that Asian countries, including China, reinvested the money earned through trade into the reserve currency, the dollar—that is, U.S. Treasury bonds. Then, the U.S. financial and capital markets were revitalized, and U.S. funds reinvested that into the world. The mechanism of money and the mechanism of trade were established with the U.S. as the axis, and that was rotating well until the Lehman shock in 2008.

However, since the Lehman shock, there has been a pressure to rebuild that mechanism. That is the phase up to today.

The QE (Quantitative Easing) by the U.S. FRB (Federal Reserve Board) is the prime example, but the world's central banks have pushed themselves to support the global economy through finance. Ten years after the Lehman shock, real economic indicators have reached a fairly good point. However, the contradiction of inequality within society remains without being easily resolved. I suspect the current situation is that this dissatisfaction is being directed toward foreign trade and foreign transactions.

Mr. Wakasugi's point that free trade brings benefits to the country as a whole but has people who suffer losses and people who gain benefits within it, and Mr. Takita's point that social inequality remains, seem to be related.

Looking at the current economic situation in the U.S., the unemployment rate has fallen below 4% for the first time in over a decade. The economic growth rate is also high. The effects of quantitative easing are appearing, and the U.S. economy, which was sickened by the Lehman shock, is improving. There is a situation where new industries leading the world are being born and growing within free trade.

Despite this, opinions calling for protectionism are becoming very strong. I believe one of the causes is that a gap has been born between those who benefit from free trade and those who do not, and the function to alleviate inequality is not working well.

Furthermore, I think China is the one that benefited most from joining the WTO. Along with the steady expansion of trade, the entire Chinese economy grew. So, I can well understand China saying that free trade is important. However, there should be a major premise that free trade is conducted based on free economic activities in the market.

Looking at the Chinese economy, whether it be the protection of intellectual property rights, various government discretions, state-owned enterprises, or the existence of subsidies, it is somewhat questionable to what extent the foundation of a market economy, which is a prerequisite for claiming free trade, is in place. I suspect many countries feel a sense of discomfort when hearing China's statements that "free trade is important."

So those aspects haven't changed.

Actually, there is a connection between China's accession to the WTO and my assignment to China; I went with the mission of getting the Chinese government to recognize the freedom of activity for general trading companies. At that time, while advanced nations understood that China might accept the basic spirit and rules of the WTO in general terms but could not implement everything in detail, they could not afford to leave it isolated in the world market, so they let it in while things were still halfway.

The contradiction there is appearing now, and as Mr. Wakasugi mentioned, skepticism is being born as to whether market principles are truly working in China. In U.S.-Japan trade friction, discussions were held with extreme detail regarding fairness, but in the case of China, systemic peculiarities have been allowed to coexist without issue, and the U.S. has also tolerated this until now. I feel that the current state of the U.S. and China exists partly as a reaction to that.

It was symbolic when they stopped the Shanghai market. At that time, I thought, "This really isn't going to work." We excused everything, including how they managed foreign exchange, saying "It's China, so it can't be helped," but it seems it's not just that. I feel that the sense that "the fundamental parts are different" lies in the depths of today's problems.

In trade negotiations between the U.S. and China, there are parts of the U.S. claims that can be understood, but also parts that cannot. I think there are about four U.S. claims. One is the problem of the massive trade deficit with China reaching 400 billion dollars. They demand in trade negotiations that this "should be reduced to 200 billion dollars in two years," but no notable results have been obtained.

In a sense, this is natural; under multilateral trade, it is originally strange to bring up bilateral trade imbalances. Furthermore, the massive trade deficit is caused by the fact that there is very active demand in the U.S. economy. It is also a U.S. problem.

Another is the protection of its own industries. I believe the tariffs on steel and aluminum were intended for the revival of domestic industries. However, for that, there must be policies to help the industry recover, such as increasing labor productivity, but such domestic policies are not seen. It remains merely protection from imported goods.

Thirdly, they are asking the partner country for market opening and expansion of imports. To enforce this, they are proceeding with negotiations while announcing punitive tariffs, but China is not convinced by such unilateral measures. While the U.S. demands the thorough implementation of a market system from China, it also demands government intervention, making it inconsistent and not necessarily understood.

The only thing that might be understood is the thorough protection of intellectual property rights and the abolition of policies with market-distorting effects by subsidies and state-owned enterprises.

However, even regarding that, there are doubts about trying to solve it through unilateral punitive tariffs. Since that is prohibited in the WTO, China naturally pushes back, and the EU and others do not consider it desirable either. Thinking that way, trust in the market is very important for the issue of free trade, and it must be addressed while cooperating with the EU and Japan, which are based on that, but the U.S. punitive tariffs are having the opposite effect.

What lies behind the U.S. trade policy?

I was very shocked that candidate Trump won. I could not fully understand why it happened. Since then, I have been thinking about why Trump won and what the background is for him to carry out such trade policies. In relation to the WTO, it can be said that Trump-style America First has brought the dysfunction of the WTO into the light of day.

I think the Trump camp had been thinking for quite some time about what kind of trade policy they would conduct if they took power. In particular, the influence of Peter Navarro (Director of the Office of Trade and Manufacturing Policy), Robert Lighthizer (Trade Representative), and Wilbur Ross (Secretary of Commerce) was enormous.

In September 2016, Navarro and Ross co-wrote a short paper. That is what is called the Trump Trade Doctrine, and the series of executive orders in 2017 are putting it into practice. To that end, they forced the resignation of Gary Cohn (former Director of the National Economic Council), a central figure of the so-called globalist faction in the White House.

The background to that is that the U.S. has so far given considerable benefits to partner countries through the WTO, NAFTA (North American Free Trade Agreement), and KORUS (U.S.-Korea Free Trade Agreement). However, there is no return for themselves. I think it means, "So, we want that return now."

Returning to the WTO, I believe the Trump administration brought the curtain down on the DDA at the 11th Ministerial Conference in Buenos Aires in 2017. Compared to the previous two Ministerial Conferences, they did not allow a Ministerial Declaration to be issued this time. Furthermore, they cut off all DDA-related negotiations, with a few exceptions. In short, I think the Trump administration's policy is to continue negotiations on specific fields together with countries that share the same opinions as the U.S.

The problem is how to proceed with WTO negotiations in a situation where there is no U.S. leadership. Whether pluri (plurilateral) negotiations by like-minded countries will succeed is now being tested. It will be very difficult to fill the leadership vacuum with cooperation among like-minded countries under the work plan since Buenos Aires last year.

The worst part of the Trump administration's policy toward the WTO is in the field of dispute settlement, where it is causing a stagnation in the appointments for the Appellate Body. Currently, there are only four members on the Appellate Body. On September 30 of this year, one more person will leave, and by the end of 2019, it will be down to one person. While there should normally be seven people, it will completely cease to function with only one. The U.S. is blocking all appointments and has said nothing about what conditions would return the appointments to normal. I think this is a very insidious tactic.

At the same time, as an exception for security under GATT Article 21, the U.S. is taking Section 232 measures of the Trade Expansion Act against imports of steel and aluminum products. Therefore, countries like the EU, Canada, China, Turkey, and Russia are suing in the WTO for violations of the Safeguards Agreement, but Trade Representative Lighthizer's view is that they are barking up the wrong tree. I think it is a strategy thought out from the very beginning to exploit the holes, or rather the flaws, of the WTO agreement. In the end, I suspect the Trump administration is aiming for the weakening of the WTO.

I think it is very significant that the Lehman shock in 2008 shook the world's norms. Market principles managed to maintain their logic when dealing with goods, but I feel that the legitimacy regarding financial markets has actually not been recovered much even today.

At the time of the Lehman shock, there was considerable discussion that the principles of financial marketism must be reviewed. For example, strengthening bank capital, not diverting commercial bank money collected from industry to investment banks, and increasing the transparency of funds were actually carried out. However, reforms such as fund regulations, re-evaluation of rating agencies, and regulations on the financial market itself, which were initially considered tasks, could not be reformed due to opposition from Wall Street and the City.

Also, entering the 21st century, the growth rate of BRICs was very high, so the ratio of the U.S., Japan, and EU economies (total GDP), which advocate globalism, fell from the 70% range to the lower 50% range. I think there is also a background where globalism relatively lost its power to control the world.

Analyzing the U.S. story in my own way, the manufacturing industry in the U.S. was supposed to have been discarded in the policies of the 90s, but in fact, the number of people employed there is quite large. Moreover, domestically, the people in finance hold power and are flourishing due to policies that support them, but the manufacturing and agricultural sectors, which are not part of that, are not flourishing.

The gap between rich and poor within the U.S. grew, creating a so-called division. This division can be said to be the background of Trump's protectionism. So, if we ask why we didn't understand why Trump emerged, I think it's because we were only looking at both the East and West coasts of the U.S. and were not associating with the people in the middle of America.

I think it's exactly right that we were only looking at the East and West coasts of the U.S. I went to New York and Detroit on a business trip in March, and in Detroit, the areas undergoing redevelopment are incredibly beautiful. It feels like the scars of the Lehman shock have completely vanished, but when you see the sight of people living around abandoned factories that used to make cars, I think there are people who probably won't be able to crawl out of this situation no matter how many years pass.

When you consider that the intellectuals and media who consider themselves liberal (progressive) completely overlooked those people who couldn't even raise their voices, I have to say that Mr. Trump's base is very strong.

The G7 summit was held in Canada the other day. There was a photo released by the German Chancellery that became a hot topic, showing Ms. Merkel standing firmly and pressing Mr. Trump. I think that is a photo that will go down in history. In other words, Ms. Merkel, who takes a so-called free trade, liberal position among advanced nations. Her position and Mr. Trump's position have created a completely deep rift.

It is very symbolic that Mr. Abe was standing in the middle. From the perspective of Japan's economic and trade policies, it is clear that he is on the side of Europe and Canada, but he probably cannot neglect the relationship with Mr. Trump due to the North Korea issue and security positioning. Therefore, he has taken a middle position. And finally, when the communiqué (joint declaration) was failing to come together and everyone was wondering what to do, Mr. Trump asked Mr. Abe, "Shinzo, what do you think?"

At that moment, the first thing Mr. Abe said was, "After all, the WTO plays an important role," and Mr. Trump's eyes went wide, but because it was "something Shinzo says," something like "the WTO in a form with improved rules" was included in the communiqué. I think that was truly the absolute limit of a landing point at the current moment and was Japan's contribution.

Afterward, at the press conference after the meeting ended, as you know, Mr. Trudeau said, "The communiqué came together like this, but the U.S. President is outrageous," so Mr. Trump lost his temper and kicked the communiqué aside.

To add a little to everyone's stories, when China joined the WTO, OECD countries expected that if China joined, China itself would change significantly, and that this would be good for China's development and for the world as a whole.

However, while China gained many benefits from the expansion of trade, when it comes to whether there was as much change in China itself as the OECD countries expected, unfortunately, I think it was a disappointment.

I suspect such things are becoming the motivation for the Trump administration to start bilateral negotiations with China. Since results cannot be expected even with multilateral consultations under the WTO, I think Trump is trying to realize his own demands through the one-on-one negotiations he is confident in.

As Mr. Fukasaku says, I think a WTO without the U.S. will not function. The U.S. has used both the GATT/WTO and bilateral negotiations while taking unilateral measures in the past. For example, when U.S.-Japan trade friction was intense from the 1970s to the 80s, they demanded unilateral measures from Japan regarding automobiles, semiconductors, color televisions, and steel products. The Structural Impediments Initiative was the same. And Japan made concessions to that.

If the other party had made concessions upon the U.S. announcement of punitive tariffs this time, there might have been a path to a solution, but this time, even after the announcement, the party that had gained strength did not concede. For that reason, they were forced to activate what they had announced. Once activated, the partner country then takes retaliatory measures. In response, the U.S. adds more retaliatory measures. I think such a situation is becoming something that exceeds expectations even for the U.S.

A particularly symbolic example is the case where part of Harley-Davidson's U.S. production is moving overseas, triggered by the tariff hike competition with Europe. Concerns are beginning to emerge that perhaps the U.S. will be isolated from the free trade zone. As a result of retaliatory tariffs, a hard-landing scenario where stock prices fall on the New York market is beginning to be predicted. I think this is a development the U.S. did not expect.

If we do not share the importance of free trade here, the global economy will end up being more adversely affected than expected.

There was a period before when the U.S. swung toward the activation of unilateral punitive measures. From the late 70s to the 80s, within U.S.-Japan economic consultations, the U.S. won concessions from Japan for various industries, starting with semiconductors, while brandishing Section 301.

If we ask what is different between then and now, I think it is that the partner is not Japan but China. First, regarding security, China does not owe anything to the U.S. Therefore, there is no need to make concessions. Furthermore, what is most important for China now is not to remain at the lowest profit margin part of the global supply chain, but to go to where they can gain more profit themselves. To that end, they want to use intellectual property well, create it domestically, and bring it in from elsewhere, so the nature of industrial policy in a broad sense has become an issue.

Another point that is different compared to the 70s and 80s is that at that time, Congress ran toward protectionism, creating Super 301 in the Omnibus Trade and Competitiveness Act of 1988 and using it as leverage for bilateral consultations. On the other hand, currently, the mainstream Republicans in Congress are rather trying to restrain what the Trump administration is doing, and movements to take back the authority to decide trade policy to Congress once again can also be seen.

Unlike that time, the President is the one leaning forward. President Trump's greatest goal is to win the midterm elections, and it is a trade policy for domestic politics, appealing to voters that "I am executing what I promised in the presidential election."

I think what you just said is an important point. There are backward-looking and forward-looking aspects to what Mr. Trump is doing. The backward-looking part is, in short, the sectors represented by steel and aluminum—manufacturing industries that have lost their competitiveness. The forward-looking part is where he intends to maintain American leadership in next-generation high-tech fields.

In the 1980s, during the U.S. bashing of Japan, they put the shackles on Japanese companies like Hitachi and Mitsubishi Electric. The sanctions the U.S. has now imposed on the Chinese smartphone maker ZTE are the same thing. The claim that they were exporting U.S.-made products to North Korea and Iran is just a pretext.

If we look at where their sights are set, it is on 'Made in China 2025'—China's initiative to establish its status as a 'global manufacturing powerhouse' by the 100th anniversary of the founding of the People's Republic of China in 2049. This is indeed becoming a major threat to the United States.

Regarding friction in this high-tech field, far from being isolated, Mr. Trump is acting with fairly all-around support from both the Republican and Democratic parties. One cannot help but think that the U.S.-China high-tech friction is the real deal.

Right now, I think China's Achilles' heel is showing in the Shanghai stock market. Since the decline since the beginning of the year has already exceeded 20%, the Chinese stock market is viewing the friction with the U.S. quite negatively. In other words, because it is already pricing in the blow to the real economy, the U.S. side likely feels that this is the time for one final push.

Conversely, if that goes too far, it could trigger a backlash from the market, similar to the Lehman shock, the previous Asian financial crisis, or Black Monday. In that sense, I feel we have reached a very high-risk point.

I completely agree, but in addition to 'Made in China 2025,' the EU has 'Horizon 2020' and Germany has 'Industry 4.0.' However, it's not as if the U.S. has such cutting-edge industrial policies.

Rather than policy, the U.S. has two main streams: active private-sector R&D and the civilian application of military technology held by DARPA (Defense Advanced Research Projects Agency). There is a sense that they lack a total industrial policy, isn't there?

That's true. Whether they are actually stealing or not is another matter, but the U.S. is saying it is outrageous to steal technology from the private sector in places like Silicon Valley. The reason they are talking about fundamentally strengthening the functions of the Committee on Foreign Investment in the United States (CFIUS) is likely because they have a very strong sense of victimhood, believing that China is stealing technology under the guise of joint ventures and acquisitions. Furthermore, they suspect that money is being poured in through state-owned enterprises in a manner like 'Made in China 2025.'

I also believe that among the unilateral measures taken by the Trump administration, the ones that receive support are the issues of intellectual property rights and the protection of high-tech technology. In the U.S., there is a suspicion that potential profits are being lost and technology is being unfairly absorbed because rights are not protected in China.

The U.S. conducts trade negotiations from the standpoint of wanting China to open its markets and establish an intellectual property system. However, because things weren't getting anywhere, they brought out retaliatory tariffs. As a result of China not backing down, the path to a solution has become invisible.

To avoid scenarios that could lead to unexpected results for the U.S., I think it would be more productive for the U.S. not to clash with OECD countries over trade, but rather to move toward securing international consensus—cooperating internationally on frameworks and rules while demanding institutional improvements from lagging countries.

Since the protectionism of the Trump administration became clear, the Japanese government moved quickly to conclude the Japan-EU EPA (Economic Partnership Agreement) and then proceeded with the TPP11 even after the U.S. withdrew. I think the current Japanese administration was quite impressive for this, but what do you think?

Japan's role is significant. I think Japan should not be too hesitant toward the U.S. and should demand a process that does not rely on unilateral retaliatory tariffs. Since the TPP is suitable to be shared as a very high-level set of free trade rules, we should not stop at TPP11 but encourage many countries to participate, eventually have the U.S. join as well, and use it as a means of pressure against countries that are slow to improve their systems.

In that sense, I think the EPA with the EU is also a very good direction.

I think the idea that free trade is important is correct both internationally and theoretically, but in practice, as mentioned earlier, it is important to consider how to control protectionism or allow parts of it. Through that, I believe it is vital to maintain free trade as a whole.

The problem there is unexpectedly serious. For example, the EU as a whole tries to maintain free trade. When the first wave, including East Germany, Hungary, and the Czech Republic, entered the EU, there was a happy union between German capital and technology and the relatively high-quality, low-cost Eastern European labor force, which was a win-win. However, when Romania and Bulgaria joined in the second and third waves, a win-win relationship was not created.

A few years ago in Romania, I asked various people, "How is it since joining the EU?" and they said, "It's not good at all." Since Romanian is a Romance language related to Italian, all the talented doctors go to Italy. Consequently, in the event of emergency surgery, critically ill patients have to get on a plane and fly to where the doctors are in Italy. Furthermore, all the dairy products cross the border and go outside, and the cheese produced there is too expensive for Romanians to buy.

In a sense, this also shows that creating something like a free economic zone does not always go well depending on the timing. Merkel's Germany faces the ordeal of protecting the free movement of people (immigrants), goods, and money within the EU. Furthermore, it faces the issue of immigration as a trial. The fact that Germany is snapping back at a U.S. that suddenly turned protectionist is, I think, a very deep-rooted theme.

Therefore, the idea that Trump's protectionism was triggered by his lack of intellect and that things will be fine once the next president takes over feels simplistic. I feel that underlying history are issues with market principles, the lack of a prescription for democracy itself, populism, and so on.

I also wonder if the definition of market principles assuming a group of selfish humans is truly sufficient. While Adam Smith mentions the "invisible hand" only once in 'The Wealth of Nations,' he discusses the "principle of sympathy" in 'The Theory of Moral Sentiments.'

Some say that economics developed in a direction that stripped ethics away from Adam Smith. I think it is necessary to discuss the issues of market principles and democracy as a package.

In recent economics, research is deepening that suggests reality can be better explained by incorporating altruistic thinking—the idea that the improvement of the other party's condition is also good for oneself.

Currently, IT, high-tech, and finance have grown into very large sectors that generate added value, but in these fields, it is possible for a small number of people to seize the lion's share. I suspect that dissatisfaction with such things is inherent in the shift toward protectionism in the U.S. I also think that when considering the rules of free trade, we need to include the issue of income inequality.

I would like to ask what kind of position Japan should take going forward.

One thing I am paying attention to is that at the WTO Ministerial Conference in Buenos Aires last December, a trilateral joint statement was issued by Japan, the U.S., and the EU, and based on that, the three parties issued a supplementary statement at the OECD Ministerial Council at the end of May this year.

Looking at the content, it outlines how to counter China in a positive rather than negative way. It includes quite specific details on how to use the WTO within that framework and how the three parties should work toward the modernization and fairness of the WTO. I think it is very positive that a format was established to do this together with other countries.

Next year, France will chair the G7 Summit, and Japan will chair the G20 Summit. Talking to people from France, there is a strong sense of "wanting to do things together with Japan if there is something we can do." I think things like the Japan-EU EPA were very good, and I believe the effort to steadily build a coalition of the willing that can reach agreements is important.

Regarding the trilateral handshake in Buenos Aires that Mr. Fukasaku mentioned, the U.S. side was represented by Trade Representative Lighthizer, and Mr. Lighthizer didn't even shake hands with the EU minister in charge. Then Mr. Seko (Minister of Economy, Trade and Industry) urged them, saying, "Let's create an atmosphere like we're shaking hands." That kind of Japanese-style attentiveness might be unexpectedly useful.

I think it is important for Japan to lead the way in protecting free trade and market principles. There is no other non-white nation that has seriously practiced globalism for 100 years, so we also know the pain involved in that process.

In other words, because we understand the feelings of those on the developing country side and the thinking of people in the West, I think it is very important to realize that Japan bears the role of proposing rules.

And when doing that in Asia now, I would like to ask for efforts not just from Japan, but also from South Korea. The Japan-Korea FTA remains uncompleted indefinitely. Between Japan and Korea, the sense of market principles and democracy is sufficiently mature that an FTA or EPA at a level comparable to the TPP could be achieved, yet progress is stalled there.

South Korea concluded an FTA with China first for the sake of its own market, and after that, they are trying to talk about a Japan-China-Korea FTA. If this happens, the level itself will drop, making it difficult for the TPP11 and a Japan-China-Korea FTA to merge.

By Japan and South Korea working well together, a path can be created to bring ASEAN and South Korea all into the TPP11. China would then have no choice but to join. In 'One Belt, One Road,' China's leading rules are transparently obvious; instead, I feel we should make more effort to bring China over to the side of Japan, Korea, and ASEAN to create rules that emphasize a single, fair ideology from any perspective.

Whether it's Trump's trade policy or China's response, it is possible that unexpected things could happen by collapsing the rules that the international community has built up and shared over many years. For example, it could cause major turmoil in the global economy by throwing cold water on a healthy U.S. economy, causing an unexpected decline in China's growth, or leading to a global drop in stock prices. To avoid such things, I think it is extremely important for Japan to play the role of calling on developing Asian nations to participate and creating the ground for sharing trade rules.

I believe what is important in free trade is to share rules with each other and conduct efficient and transparent transactions under them. I think Japan is in a position to actively work toward that.

Thank you for the lively discussion. Finally, I would like to organize what I have heard today in my own way. The keyword I would like to highlight today is that things are unexpectedly "deep-rooted."

First of all, there was a change in the power balance. In the case of Japan and the U.S., there were parts that were easier for the U.S. to handle due to security reasons. However, the problem is becoming more serious because China, which has no security relationship with the U.S., has gained power. In that sense, it is deep-rooted.

China joined the WTO and benefited from it, and other WTO member countries expected that China's domestic situation would also change as a result. As a result, while China's economy improved, its market mechanisms did not change enough to gain the trust of other countries. In the sense that the domestic situation in China has not changed much even after joining the WTO, this is also deep-rooted.

On the other hand, in the U.S., there are people who benefited from free trade and those who did not. Policies driven by backward-looking movements, emerging from places like the abandoned areas of Detroit, are surfacing in a way that exploits loopholes in the WTO. We tend to think as if the protectionist movement surfaced because Mr. Trump appeared, but I felt it might be deep-rooted in the sense that even if the president changes to someone else in the future, this movement might not subside.

Based on that, I would like to mention four points. First, as seen in the experience of past Japan-U.S. trade negotiations, in the end, the ones who suffer the most from protectionist policies are domestic consumers. In other words, because protection causes the price of goods to rise, consumers end up paying more. In addition, since situations where domestic companies flee overseas are also occurring, protectionism is negative for consumers and potentially negative for producers as well. I believe this point should be widely recognized when discussing protectionism.

Second, related to this, is the question of whether market principles are truly functioning. I think this is a very large theme, but one view is that market principles different from the ones we previously assumed are at work.

Standard international economics assumes that industrial adjustment will go well through trade liberalization. In particular, the U.S. labor market was said to be able to respond more flexibly than Japan's, and it was thought that adjustment would work through that. However, recent research has introduced the concept of "local labor markets" that contradicts this.

In reality, the U.S. labor market is not as flexible as everyone thinks and is quite fixed. It is particularly divided by educational background, and in the case of workers with less than a college education, there seems to be a tendency for less movement across state lines. If there is no regional movement of workers and the benefits of trade do not reach those people, I think that is an important issue that needs to be considered in the future.

Related to that, the third point: the issue of distribution has been said in international economics to be something that must be considered as a domestic policy after liberalization. However, I felt there is a need to deepen the discussion by not separating the two and treating them as a package.

Fourth is the movement of finance and people. I think this part requires a different response from goods, or rather, needs to be considered a bit more carefully.

Finally, regarding Japan, the opinion of everyone was basically that it is fine for Japan to be the standard-bearer for free trade. On the one hand, while pushing forward regional-level free trade agreements such as the TPP and the Japan-EU EPA, it would be good if we could also contribute to the modernization of the WTO. I understood that in considering the future global economy and trade system, the important role Japan plays is not just rule-making, but making it possible to share those rules.

Thank you very much for a very suggestive discussion today.

*Affiliations and titles are as of the time this magazine was published.