Japan and the United States have just concluded a trade agreement that focuses narrowly on agricultural products and digital trade. At the Japan-U.S. summit held on Sept. 25, the mood of the two leaders looked apparently different. U.S. President Donald Trump appeared extremely pleased with the agreement because positive feedback received from various domestic agricultural and livestock groups might help boost his re-election bid.
By contrast, Prime Minister Shinzo Abe had to repeatedly emphasize that the agreement was a win-win deal benefiting Japan as well. Why did Abe need to do that? This was partly because the joint statement was vague about the treatment of Japan’s export of cars and auto parts. Not only were tariff cuts postponed, but also an exemption of the 25 percent additional tariffs implementable on national security grounds pursuant to Section 232 of the Trade Expansion Act of 1962 was not officially confirmed. Another reason was that the reaction from the Japanese public remains ambiguous and confused while concerns have been raised from domestic agricultural and livestock groups who fear losing market share to more competitive producers from abroad.
The U.S. trade representative released a “fact sheet” on the trade agreement, which reveals that the agreement is apparently more beneficial to the U.S. than Japan. It is appealing to U.S. agricultural sector voters because Japan will cut import tariffs on beef, pork, wheat, dairy products, wine and other products to the level secured under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP) that took effect in December 2018. As a result, U.S. exporters hope to recover their lost market shares quickly from Australia and Canada, as well as from Europe after it gained comparative advantage due to the Japan-EU economic partnership agreement that came into effect in February this year.
In sharp contrast, no tariff cuts or abolitions were agreed to on car and auto parts, which are the two biggest items of Japan’s exports and account for 35 percent of Japan’s total exports to the U.S. Only some other industrial products and some food products such as green tea and soy source will be subject to tariff abolitions. This is a setback from the previous promise made by the U.S. on eventual abolition of the tariffs at the TPP negotiations under President Barack Obama before the withdrawal in 2017.
Trump is rushing to implement the trade agreement sometime this year or early next year. To do so, the U.S. government is treating this agreement only as a “first stage” and will seek to implement it without congressional approval pursuant to provisions of the Trade Priorities and Accountability Act of 2015, which might permit Trump to unilaterally implement certain trade agreements covering only tariff barriers and if tariff cuts are less than 5 percent.
What will be Japan’s gains?
Japan’s priorities during the negotiations were centered on two goals: preventing a substantial cut in agricultural tariffs beyond the CPTPP levels and protecting the auto industry by preventing an application of the 25 percent prohibitive tariffs. By making greater concessions, the former was achieved successfully while the latter was achieved for the time being.
Indeed, there is a sense of relief among manufacturers given that the worsening trade dispute between the U.S. and China has been hurting Japan’s exports and manufacturing production this year. Despite a series of trade liberalization measures, moreover, the contribution of net exports to real GDP growth in Japan are expected to be negative this year.
What will happen in the next stage of negotiations? Japan needs to prepare for tougher negotiations with Trump, who is preoccupied with pleasing U.S. voters. First, the U.S. may introduce some concrete measures, especially against Japan’s exports of cars and auto parts, given that those products account for about 80 percent of the U.S. trade deficit. It is difficult to imagine that the U.S. government would be willing to abolish those tariffs.
What measures will be chosen is uncertain, although the Japanese government stressed that export volume constraints included in the new U.S.-Mexico-Canada Agreement (USMCA) is unlikely. Second, a so-called poison pill that requires Japan to notify the U.S. if negotiating a free trade agreement with China might be added, which would work against Japan’s intention to achieve the Regional Comprehensive Economic Partnership including China. Third, Japan’s fear is the inclusion of the foreign exchange clause against currency manipulation like the one included in the USMCA, which Japan’s government is desperately trying to avoid in order to keep a free hand in foreign exchange intervention in case of a sharp, steady appreciation of the yen.
In any case, Japan continues to find ways to please Trump while avoiding a worst-case scenario for Japan’s economy.
Sayuri Shirai is a professor at Keio University and visiting scholar at the ADB Institute.