Op-eds

Getting Japan to Guzzle American Gas

by Gary Clyde Hufbauer, Peterson Institute for International Economics

Op-ed on Bloomberg.com
April 24, 2013

© Bloomberg

 


Japanese Prime Minister Shinzo Abe expected a sharp debate at home when he said his country wanted to join the Trans-Pacific Partnership (TPP). He may not have anticipated a sharp debate in the United States.

After all, rarely does Washington have the pleasure of opening new trade negotiations when the potential benefits are so heavily stacked in the United States' favor.

Why so? Because Japan's nontariff barriers—protecting major sectors of the economy, including services, agriculture, and selected manufactures—start from much higher levels than equivalent US barriers, and the TPP aims to reduce them all, preferably to zero. Japan's inclusion in the trade pact will boost American exports, create American jobs and make both economies more efficient, now and well into the future.

Few sectors stand to gain so much as the growing US liquefied natural gas (LNG) industry. Japan's membership in the TPP, coupled with long-term US supply assurances, will deliver exponential LNG export growth to a huge market hungry for alternative energy supplies. The timing couldn't be better: Right now, America's competitive advantage in exploration and extraction is unrivaled.

Japan, the world's third largest economy, is also the single largest buyer of natural gas. Given the country's indefinite moratorium on expanding the nuclear energy program, Japan's reliance on natural gas is sure to increase. In fact, Japan faces the prospect of replacing some 12,000 megawatts of nuclear-generating capacity. The total dearth of natural gas resources means that Japan must rely heavily on LNG imports as an alternative source of clean power.

Gas Riches

Even though the United States is one of the world's largest and most advanced natural gas producers (the industry is already responsible for half a million jobs), and the US-Japan security alliance is critical, the United States hasn't yet capitalized on Japan's need for assured LNG.

In 2012, Japan imported a record 87 million tons—an increase of 11 percent compared with the previous year—from nations such as Qatar, Russia, Australia, and Indonesia. But the US share of this business has been tiny.

After the Fukushima disaster, Japan was able to meet its immediate energy needs by paying premiums for the diversion of LNG shipments from intended markets. But Japan harbors a determined interest in long-term agreements with US exporters. Abundant American supplies, their reliability (with the right US policies), and the prospect that US LNG will be among the cheapest all make American LNG an ideal long-term source.

Under current US law and Energy Department regulations, the export of LNG to Japan can be ensured only by a free-trade relationship with the United States, and the only prospect for this relationship is the TPP agreement. To be sure, the Energy Department could amend its rules so that LNG could be exported to any country, with or without a free-trade pact.

A reform of this sort is being debated by senior energy officials, and President Barack Obama will probably have the last word. But even if the current regulations are changed, Japanese LNG buyers and US LNG sellers will all feel much more secure with a guarantee of free trade in energy written into the TPP. LNG export and import terminals, and specialized ships to carry the LNG, require investment of $10 billion or more, and the payback time is typically 20 years. Companies contemplating investments of this size and duration need legal security.

A trade pact deal that includes Japan will open new and lucrative markets to US exporters in other sectors, including services, agriculture, automobiles, select manufactures, and possibly coal from the Powder River Basin.

Creating Jobs

Meanwhile, Japan will continue to expand its already large stock of direct investment in the United States. Both through trade and investment, the TPP with Japan will support far more US jobs than a TPP without Japan.

Obama declared on his first presidential trip to Asia, back in November 2009, that the United States would engage with the other TPP countries—Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam—to shape an effective, mutually beneficial regional-trade agreement.

Japan's inclusion will immediately elevate the stature of this 21st century pact into an opportunity to renew the US-Japan partnership. It will establish firmer rules for resolving commercial differences between the world's No. 1 and No. 3 economies, and ensure that the pact covers roughly 40 percent of global gross domestic product. It recognizes the importance for the United States of trans-Pacific trade and affirms Japan as a strategic ally.

Not least, it ensures that the US LNG industry can lead the world to a cleaner, more efficient, and more affordable energy future.



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