This week, President Joe Biden will host the leaders of Japan and the Philippines, two close allies of the United States. On Thursday, Japanese Prime Minister Fumio Kishida will address a joint meeting of Congress, a rare honor and symbolic of the most important U.S. bilateral relationship in Asia. Also on Thursday, Biden will meet with the president of the Philippines, Ferdinand Marcos Jr. And at the end of this week, all three leaders will sit down and discuss important topics involving economic policy and regional security in Asia. Importantly, both the Philippines and Japan recognize the threat that Chinese expansionism poses to Asia.
Japan is a global economic power. Its economic output ranks fourth globally after the U.S., China, and Germany. The economies of the U.S. and Japan are tightly integrated and account for 30% of the world’s gross domestic product. Very importantly, the capital markets of the U.S. are dependent on Japanese excess savings to fund the large U.S. fiscal deficit. U.S. domestic savings are insufficient to fund the deficit. Japan also has a 31% global market share in the critically important semiconductor fabrication market. Japan’s Nikon ranks second only to the Dutch company ASML in the critical area of semiconductor lithography fabrication machines.
Top line: The global fight against Chinese hegemony will be won or lost on the economic playing field. Japan is a critical ally. U.S. policy should be directed at removing all trade barriers between the two countries and at eliminating misguided direct investment impediments, such as political opposition to Nippon Steel’s proposed acquisition of U.S. Steel.
The Philippines also matters in this regard. Manila is a rising middle-income power. For over a decade, the Philippines has achieved an average annual GDP growth of more than 5%. It should be an upper-middle-income country by 2026. With a growing population of almost 120 million, the Philippines is an attractive destination for U.S. foreign direct investment. But the U.S. lags badly in investing in the Philippines, which is strange given the historic relationship between the two countries. Japan is the Philippines’s No. 1 foreign direct investor.
A focus of U.S. policy toward the Philippines should be greater foreign direct investment. As U.S. companies exit China, the Biden administration should encourage the departing companies to look at the Philippines for lower-skill manufacturing operations. The Philippines is globally competitive in manufacturing. The Philippines would be an ideal partner for semiconductor manufacturing facilities for both U.S. and Japanese semiconductor design companies. The country already has a market share in the global semiconductor supply chain. A tripartite semiconductor technology agreement would be a welcome outcome of the meetings that will take place this week in Washington, D.C.
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The U.S. should also work toward a free trade and investment agreement with the Philippines. There continue to be significant trade barriers between the two countries. Under free trade and free market capitalism, economic growth is fostered. When the countries that rim China have vibrant economies, they will have the resources necessary to deter and contain China.
The dream of the Trans-Pacific Partnership free trade agreement is dead, blocked by short-sighted economic populists from both U.S. political parties. But given the exigent growing threat of Chinese imperialism, U.S. policy should strive to knit Japan, the Philippines, and the U.S. into a strong fabric of economic and international security cooperation.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note.
