Japan will have little choice but to enter into a bilateral trade deal with the United States similar to one President Donald Trump clinched with South Korea, a former top currency diplomat from Japan said.

Naoyuki Shinohara, who was also deputy managing director at the International Monetary Fund, said Washington will keep pushing for a bilateral free trade agreement with Japan, given Trump’s “America First” agenda — and Tokyo’s calls to use a multilateral framework will only buy it some time.

“The United States is only interested in a bilateral deal and probably won’t listen to Japanese calls for a multilateral approach on trade,” said Shinohara, who remains in close contact with international financial diplomats.

“Japan will eventually have to enter FTA talks” and face U.S. pressure to open up its auto and farm markets, he said Friday.

Global markets were shaken this month when Trump moved to impose tariffs on Chinese goods and Beijing threatened similar measures, stoking fears of a global trade war.

Shinohara said there was a small but real risk of a U.S.-China trade war, which could spiral out of control given Trump’s unpredictability.

“A trade war is a worse-case scenario and doesn’t make economic sense as both sides will lose. But once there’s a war, it’s hard to stop shooting. The possibility is small but not unthinkable,” he said.

An escalating trade spat could spread, including to Japan, said Shinohara, who is a professor at a University of Tokyo research institute.

Japanese policymakers worry that Trump could use a similar approach to the one he took with South Korea, which agreed on a trade pact with a side deal to deter competitive currency devaluation.

Shinohara, who coordinated Asian policies during his IMF stint, said there was a “pretty good chance” Washington will make similar demands to Japan — entering talks for a bilateral FTA, with a side deal on currencies.

Trump will use such talks to demand more U.S. access to Japan’s auto and highly protected agricultural markets, he added.

Japan and the United States remain at loggerheads on how to frame trade talks, with Tokyo pushing back against U.S. calls for negotiations on a bilateral FTA.

Deputy Prime Minister Taro Aso has ruled out opening up talks for a bilateral trade deal, stressing that this would do no good for Japan.

Trade will likely feature as a topic when Trump and Prime Minister Shinzo Abe hold a summit later this month.

On Friday in Washington, the Office of the U.S. Trade Representative urged Japan to open its markets further in its annual report.

In particular, the 2018 National Trade Estimate Report on Foreign Trade Barriers criticized Japan’s import barriers against beef and other farm products, as well as automobiles and auto parts.

In the report, the Office of the USTR reiterated its request that Japan scrap its measure that limits imports of U.S. beef to that from cattle aged 30 months or below because of concerns over bovine spongiform encephalopathy, commonly known as mad cow disease.

The report also said, “A variety of nontariff barriers impede access to Japan’s automotive market, and overall sales of U.S.-made vehicles and automotive parts in Japan remain low.”

Information from Jiji added

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