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US-Japan Trade Agreement Negotiations: Why Now?

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Tokyo Report | Economy

US-Japan Trade Agreement Negotiations: Why Now?

Japan is ready to give Trump a signature economic win. Here’s why.

US-Japan Trade Agreement Negotiations: Why Now?
Credit: Twitter/ USTR

In a two-day meeting that started on April 15, trade delegates from Japan and the United States held the first round of trade agreement negotiations. The meeting is expected to set the ground for a series of upcoming summits between Prime Minister Shinzo Abe and President Donald Trump. While the kick-off of the official trade talks could have started much earlier, as the Trump administration already gave Congress its 90-day advance notification on October 16, 2018, the timing of the initial negotiation between Japanese Economic Revitalization Minister Toshimitsu Motegi and United States Trade Representative (USTR) Robert Lighthizer seems to have been carefully arranged by the Japanese side. Given the wish on both sides for a quick deal, the outcome will be a “skinny” deal at best, yet the achievement could be a win-win for both leaders if it’s materialized efficiently.

However, one may wonder why Japan is now ready to give Trump a trade trophy, even though it is not necessary for the Japanese side to capitulate immediately to his trade demands.

A Long Path to Bilateral Trade Negotiations — or Just Déjà Vu?

The Trump administration has employed the “America First” strategy as their defining electoral and governing catchphrase. In economic terms this means regarding trade surpluses as evidence of “winning” and deficits as “losing;” the stated goal is consequently forging bilateral deals to reduce America’s trade deficit with its key partners. Along with this, more aggressive use of trade remedies and tackling perceived unfair practices have also been critical pillars of Trump’s trade policy, including the U.S. withdrawal from the Trans-Pacific Partnership (TPP) and unilateral tariffs to level trade imbalances. However, it is not the first time that the United States has relied on so-called “aggressive unilateralism” in the history of the U.S.-Japan economic relationship.

While the relationship between the United States and Japan is often said to be the most resilient bilateral in the world, unlike the other key U.S. allies in Asia-Pacific, they lack a free trade agreement (FTA), despite the Article II of the US-Japan Security Treaty committing the parties “to eliminate conflict in their international economic policies and will encourage economic collaboration.” The previous Obama administration had a historic joint accomplishment with Japan on trade, the TPP. Since the advent of the Trump administration and its pull-out from the pact, Japan’s line has been fairly linear: The United States should come back to the TPP. Indeed, this was the precise message that Abe repeated on a number of occasions when he met with Trump.

In their first joint statement in February 2017, on the one hand, Japan confirmed that the United States would not oppose its salvaging the TPP-11 framework – which was successfully concluded and entered into force at the end of 2018. On the other hand, they established the bilateral Economic Dialogue between Deputy Prime Minister Taro Aso and Vice President Mike Pence, and a subordinate channel dubbed as the “Free, Fair and Reciprocal (FFR),” between Motegi and Lighthizer was later attached under it. Nevertheless, the acceleration of the bilateral channel had to wait until the world’s largest and third-largest economies decided to commence their bilateral trade negotiations, primarily because it might send the wrong message to the rest of the TPP members.

Why has Japan finally accepted the U.S. request to forge a bilateral trade agreement after rejecting the idea for over three decades? The trigger was two-fold. First, while hedging bilateral channels with the United States, Japan prioritized mega FTAs. Faced with the increasingly inward-looking United States, Japan rushed to forge the two mega regional trade pacts, namely the remolded Comprehensive and Progressive TPP (CPTPP) and the Economic Partnership Agreement (EPA) with the European Union (JEEPA). The 11 members of the CPTPP successfully signed the deal in March 2018; Japan and the EU signed their own agreement in July 2018. For Japan, the commencement of talks on a bilateral deal with the United States could come only after these achievements. As such, they agreed to “enter into negotiations” in the seven-point joint statement issued in September 2018, just after the signing of the JEEPA.

Second, lessons from experience mattered. The EU was expected to start bilateral trade negotiations with Washington prior to Japan. But the timing for U.S.-Japan trade agreement talks was carefully settled to dodge the U.S. bluff on increasing tariffs on autos and auto parts, as Trump had threatened in the past. Japan has already experienced a U.S. tariff hike, despite its strong opposition. The Trump administration added Section 232 tariffs on imports of steel and aluminium in the name of national security. With that context, the Japanese fear over possible tariff hike on automobiles – Japan’s top export to the United States and a major source of the American trade deficit — seemed to be a trigger in preparing the negotiation table. With the threat expiring in mid-May, 90 days after the submission of the investigation report in February, commencing negotiations seemed the safest way to avoid a tariff hike because both sides had already confirmed to lift Section 232 penalties as long as the negotiations continued.

The Trade Talks: Scope and Prospects

Written in diplomatically ambiguous language, the joint statement in September 2018 left much room for interpretation. The third point of the joint statement, for instance, refers to the scope of the deal as they enter into negotiations for a “United States-Japan Trade Agreement on goods, as well as on other key areas including services, that can produce early achievements.”

For Japan, the trade talks are envisioned in two stages, and the Abe administration domestically explains that it is pursuing a Trade Agreement on Goods (TAG), not a complete FTA. The Japanese side understands the first stage of the negotiations will deal with goods, as an area of early achievement. After that, both parties “intend to have negotiations on other trade and investment items following the completion of the discussions,” as the fourth point of the joint statement stipulates. While Japan’s “FTA phobia” is not new (as they usually call such deals “Economic Partnership Agreements” instead), as 2019 is an election year in – both upper and lower house elections are scheduled – the trade negotiations with the United States could be a highly sensitive issue. For the United States, on the other hand, the primary targets of what they call the U.S.-Japan Trade Agreement (USJTA) are automobiles and agriculture. While they also lack “free trade” terminology, the Trump administration ultimately expects a complete FTA, demanding that Japan balance the trade deficit, which tallied $67.6 billion in goods in 2018, and open market access in the agriculture sector to help American farmers left disadvantaged in access to the Japanese market because of the mega FTAs. Take the case of TPP: the tariff on Japanese imported frozen beef for CPTPP members decreased to 26.7 percent from the standard rate of 38.5 percent, whereas tariff on imports from the United States could rise to 50 percent – nearly double, if volumes surpass certain levels under the current safeguard rules.

The first round of negotiation, therefore, was dedicated to a scoping exercise to define the agenda and the way to proceed with negotiations. Consequently, while they decided to meet again just before the forthcoming leader’s summit in the following week, both parties agreed to continue the negotiations based on the joint statement last September, which means the trade talks will mainly focus on a narrow range of topics such as goods and partial service trade, like digital trade, where the United States and Japan can jointly address the need to establish high standards.

The U.S. side keeps applying pressure to level the trade deficit, whereas the Japanese side has insisted on several points. First, regarding market access, the previous EPAs (i.e. the CPTPP and JEEPA) constitute the maximum level of Japanese commitment. Second, while the U.S. side indicated the need to deal currency manipulation, both parties already affirmed that the issue should be discussed between finance ministers, which is expected to take place on the sideline of the upcoming summit. Third and finally, as “rule-based trade” is vital for Japan, any sorts of voluntary export restrictions (VERs) and quotas are unacceptable because it would breach WTO rules. It is critical for Japan to keep away these USMCA-style provisions as they would undermine the golden rules forged under the TPP.

What is clear now is that the United States and Japan share the desire for a quick deal at least at the ministerial level. The trade negotiations will be followed by the upcoming summit between Abe and Trump in April, and the U.S. president is expected to visit Japan twice in the coming months, once for a possible state visit in May and again for the G-20 in June, in furtherance of the trade talks. As Lighthizer did not list controversial issues that might prolong talks — such as pharmaceutical pricing and currency manipulation — in the objectives this time, this sort of tone toward negotiations suggests that both parties may be looking to seal something in the short run. If the talks are successfully concluded within this year – regardless of the degree and depth — both Abe and Trump can sell early achievements at home to boost their electoral campaigns.

However, it is too early to tell the outcomes, and there remain several risks. First, nobody can be sure about Trump’s trade demands and at what point he would be satisfied. Since Japan already passed the original TPP and relevant acts at the Diet, which did include the United States, this precedent could be Japan’s negotiating card on controversial agricultural issues. Indeed, prior to the bilateral trade negotiations, the Japanese side did not table any Diet resolution this time, contrary to the case in preparing for the difficult trade deals with other competitive agriculture exporters. One notable example is the Diet resolution in 2006, which set out the so-called “sacred items” such as rice, wheat, and beef/pork, for negotiations with Australia. That was later copy-and-pasted in the Diet resolution for the TPP negotiations. As Motegi indicated, these precedents are Japan’s red-line. To achieve a reciprocal deal, Japan can also request a U.S. concession once agreed to in the TPP, such as an immediate tariff cut in auto parts as well as market access for specific agriculture products like Kobe beef.

Second, if both sides end up with a mere “skinny” deal, the world’s largest and third-largest economies would not send the right message at the G-20 leader’s summit in Osaka. As such, it is critical to jointly tackle an advanced area of rule-making such as digital trade as part of the trade negotiations.

Last but not least, it is critical for Japan to secure an eternal exemption from any aggressive use of trade remedies. Unlike other key U.S. trade partners, Japan did not retaliate to Section 232 tariffs on imports of steel and aluminium. The recent Toyota president’s “never leave” speech in Washington, D.C. adds fuel for further investment and job creation in the United States. The series of these voluntary initiatives show Japan’s “strategic generosity” to give Trump at least a bronze trophy in the trade field, if not a golden one.

Yuma Osaki is a Ph.D. candidate at the Graduate School of Law, Doshisha University. His research interests are in international political economy in the Asia-Pacific region, theoretical and empirical study of regional integration, international trade governance, and foreign policy in Japan and Australia.

The author appreciates the supports of Sojitz Foundation and the USJI Scholar program for this research.