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Japan needs 'bargaining leverage' as U.S. likely to push for bilateral trade deal

by Ko Hirano

Kyodo

Given U.S. President Donald Trump’s calls for breaking down trade barriers and expanding American exports as part of “fair” international commerce, his administration appears likely to push Japan to further open its agriculture and automobile markets.

Reflecting Trump’s preference to handle trade issues bilaterally — focused on reducing U.S. trade deficits and advancing the interests of U.S. industry and American workers under the “America First” policy — U.S. Vice President Mike Pence previously signaled eagerness to pursue a free trade agreement with Tokyo in place of the Trans-Pacific Partnership — the massive 12-nation trade deal Washington ditched in January.

U.S. Trade Representative Robert Lighthizer called Japan “a primary target” for greater market access for U.S. farm products, while William Hagerty, Trump’s nominee for U.S. ambassador to Japan, cited agriculture, defense, manufacturing and energy as key areas for more U.S. exports.

During the confirmation hearing for Hagerty on May 18, Sen. Rob Portman of Ohio criticized Japan for not accepting U.S. auto safety standards that he touted as “the best in the world,” saying it creates “a nontariff barrier.”

“So that’s an example where we would expect you to stand up for us,” Portman told Hagerty. “And to open up that market more in the context of a bilateral trade negotiation.”

Japan is cautious about forging an FTA with the United States because it would prompt the Trump administration to demand concessions — especially in politically sensitive sectors such as agriculture — beyond those that it already agreed to during the 12-nation talks that sealed the TPP under the leadership of Trump’s predecessor Barack Obama.

Meeting on the sidelines of a two-day summit of the Group of Seven nations that ended Saturday in Taormina, Sicily, Trump and Prime Minister Shinzo Abe affirmed that free and fair trade is important, but Trump did not bring up a Japan-U.S. FTA, a senior Japanese official said.

The absence of reference by Trump to an FTA with Japan may reflect the fact that Trump has just started a process of renegotiating the North American Free Trade Agreement with Canada and Mexico, a major campaign pledge that could leave the new U.S. administration with little time to prepare for other trade deals.

Trump might also wait to see the result of his administration’s ongoing study on the causes of U.S. trade deficits with Japan and other major trading partners such as China, Germany and Mexico.

On March 31, Trump directed trade officials to review country-by-country, product-by-product tariffs, nontariff barriers, government subsidies and other trade restrictive measures and report the findings in 90 days.

Referring to remarks by senior U.S. officials and lawmakers, Mireya Solis, a senior fellow at the Brookings Institution, a Washington think tank, said, “The signals are very clear that the United States wants to negotiate a free trade agreement with Japan.”

Citing the likelihood that NAFTA renegotiations will take longer than Trump expects, Solis suggested that Japan “play for time” and engage in “pre-negotiation talks” with the Trump administration to clarify how it intends to put into effect its America First trade policy, given concerns that it may include protectionist measures.

In a sign of what specific actions his administration may take, Trump told the G-7 summit that if the United States has low tariffs on certain import items, other countries should cut tariff rates to U.S. levels to produce trade of a “reciprocal nature,” according to a senior White House official.

“Reciprocal is like if you’ve got a 30 percent tariff, we should have a 30 percent tariff,” Gary Cohn, director of the National Economic Council, quoted Trump as telling his counterparts from Britain, Canada, France, Germany, Italy and Japan along with the European Union. “But really you should have a zero percent tariff.”

A senior Japanese Finance Ministry official cautioned that the imposition of a “reciprocal” tariff of 30 percent, for example, would be seen as a protectionist measure because it runs counter to World Trade Organization rules.

In a veiled criticism of Japan’s auto safety standard system, Cohn quoted Trump as telling his G-7 peers, “If you’re putting our cars through an excruciatingly difficult test for safety to see if they can be imported to your country, maybe we should put your cars through an excruciatingly difficult test to see if they’d be imported to our country.”

Solis said Japan should clearly convey its position to the United States that the upper bound on market access was achieved during the TPP negotiations. The TPP, for example, would have reduced a 38.5 percent tariff Japan imposes on fresh and frozen beef cuts to 9 percent over 16 years.

Finance Minister Taro Aso warned that there is “no guarantee” the Trump administration would win better terms under a bilateral pact with Japan because a multilateral framework like the TPP allows members to offset concessions made with one country with advantages gained from another.

To make pre-negotiation talks with Washington more effective, Solis urged Tokyo to take the lead in bringing an 11-member TPP into force because once implemented, Japan — and the 10 other members — could say no to the Trump administration’s possible demand for greater market access and other concessions.

“Create alternatives” to Trump’s push for bilateral trade deals, she said. “The value of enacting a ‘TPP 11’ lies not only in the gains of improved market access to remaining member economies or the preservation of a rule book that aims to reform state-owned enterprises. It also increases Japan’s bargaining leverage vis-a-vis the U.S.”

Just as Japan continues to urge the United States to return to the TPP by stressing its economic merits and strategic significance, the Brookings scholar hopes the pressure from a TPP 11 may eventually bring the United States back to multilateral trade agreements that are — compared with bilateral deals — better suited to a world of integrated supply chains.