Getting Japan to guzzle U.S. gas

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 U.S.

After all, rarely does Washington have the pleasure of opening new trade negotiations when the potential benefits are so heavily stacked in the U.S.’s 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 U.S. 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 U.S. liquefied natural gas (LNG) industry. Japan’s membership in the TPP, coupled with long-term U.S. 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.

Even though the U.S. is one of the world’s largest and most advanced LNG producers (the industry is already responsible for half a million jobs), and the U.S.-Japan security alliance is critical, the U.S. 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 not from the U.S. - to date, it has exported no LNG to Japan.

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 U.S. exporters. Abundant American supplies, their reliability (with the right U.S. policies) and the prospect that U.S. LNG will be among the cheapest all make American LNG an ideal long-term source.

Under current U.S. law and Energy Department regulations, the export of LNG to Japan can be ensured only by a free-trade relationship with the U.S., 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 U.S. 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 U.S. exporters in other sectors, including services, agriculture, automobiles, select manufactures and possibly coal from the Powder River Basin.

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

Obama declared on his first presidential trip to Asia, back in November 2009, that the U.S. 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 U.S.-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 U.S. of trans-Pacific trade and affirms Japan as a strategic ally.

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

*The author is the Reginald Jones senior fellow at the Peterson Institute for International Economics.

by Gary Clyde Hufbauer