U.S.-Japan Trade Talks: What to Expect

By Matthew P. Goodman & Ann Listerud — 

Photo: MANDEL NGAN/AFP/Getty Images.

The United States and Japan are scheduled to launch formal trade negotiations soon. The precise timing is unclear: although a statutory 30-day waiting period after publication of the U.S. negotiating objectives ended on January 20, the government shutdown in Washington has sharply curtailed staffing at the office of the U.S. Trade Representative (USTR) and halted work at the U.S. International Trade Commission (USITC) on a mandated report on proposed tariff modifications.

The stakes are high: the negotiations could produce the largest bilateral trade agreement in history, bringing together as they do the world’s first- and third-largest economies, representing some 30 percent of global GDP. The talks are likely to dominate U.S.-Japan relations at a time when the two allies are dealing with a range of external challenges, from North Korea’s nuclear program to China’s assertiveness in the region.

Q1: How high of a priority are the Japan talks for the Trump administration?

A1: The U.S.-Japan negotiations are arguably not at the top of the administration’s trade agenda. Other priorities for USTR Robert Lighthizer in 2019 include trying to strike a credible deal with China pass the United States-Mexico-Canada Agreement (USMCA), and reform the World Trade Organization (WTO). The body language suggests that Lighthizer and President Trump are more eager to get an early deal with the European Union than with Japan.

But the Japan talks are important in the administration’s calculations for several reasons. First, despite its stated preference for bilateral deals over multilateral arrangements, the administration has yet to initiate or complete a new bilateral negotiation with any country. A deal with Japan is arguably the lowest hanging fruit, given that most of the difficult issues were resolved during the erstwhile Trans-Pacific Partnerships (TPP) negotiations; other deals being mooted—with the European Union, the Philippines, and the United Kingdom—range from difficult to impossible in the near term.

Second, the administration faces growing pressure from U.S. agricultural exporters to reach a quick deal with Japan. Farmers and ranchers are already reeling from lost markets in China due to retaliatory tariffs by that country. U.S. cattlemen are about to face intensified competition in the lucrative Japanese beef market, as Japan’s tariff on Australian beef starts to move down to 9 percent under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP); because of President Trump’s decision to withdraw from the original TPP, the tariff on imported U.S. beef will remain at 38.5 percent. Similar headwinds face U.S. pork exporters as Japan starts to implement its new preferential trade agreement with the European Union.

Third, President Trump is determined to rectify the large imbalance in automotive tradebetween the United States and Japan. For over 30 years, Trump has railed against perceived Japanese unfairness in the auto sector. In its negotiating objectives for the Japan deal (dissected by my colleagues Bill Reinsch and Jack Caporal here), USTR says it intends “to obtain fair and more equitable trade in the motor vehicle sector, including provisions designed to address non-tariff barriers in Japan as well as to increase production and jobs in the U.S.” Most trade watchers believe that GM and Ford are more interested in defending their market positions in the United States and third countries than in selling cars in Japan, but President Trump’s passion on this subject is clear, and that is likely to set the tone for the bilateral talks.

Finally, the Trump administration views the Japan negotiations as an important vehicle for extending to other trade deals what it sees as signature achievements in USMCA. These include the so-called “poison pill” provision, which allows the United States to withdraw from an agreement if the other party or parties negotiate with a “non-market economy”—code word for China. The administration also wants to see the first-ever provisions on currency manipulation that it achieved in USMCA included in the Japan deal.

Q2. Why did Japan agree to bilateral negotiations with the United States?

A2: For the first 18 months of the Trump administration, Prime Minister Shinzo Abe’s government resisted pressure from the White House to launch formal bilateral trade negotiations, fearing domestic political blowback if it were forced to re-litigate issues addressed in TPP. Instead, Abe tried to persuade President Trump to reverse his decision on TPP and return to the plurilateral agreement.

Two things changed Tokyo’s calculations. First, after flirting with the idea publicly in early 2018, President Trump eventually made clear that he had no intention of returning to TPP. Second, the announcement by the administration in May 2018 of a Section 232 investigation on the potential threat to U.S. national security posed by imported automobiles and auto parts raised the specter of broad tariffs on Japan’s most economically and politically sensitive export sector.

Against this backdrop, the Abe administration warily agreed in September 2018 to enter into bilateral trade talks. With Tokyo insisting that the ultimate objective not be described as a “free trade agreement” (FTA), the two sides agreed to a two-stage process involving an early “trade agreement in goods and other key areas including services,” followed by negotiations on “other trade and investment items.” Tokyo also made clear that it would not make concessions on agriculture that exceeded its commitments in TPP or the EU-Japan agreement.

Tokyo has several incentives to conclude a bilateral deal as quickly as possible. First, it has already resolved the difficult domestic politics on agriculture and is ready to offer U.S. farmers and ranchers the same deal they got in TPP. Tokyo also wants to lock in a commitment by the Trump administration not to impose tariffs on Japanese autos and auto parts. And most important, it wants to set aside contentious bilateral trade issues and get back to working with Washington on regional economic rule-making and norm-setting in the Indo-Pacific region—advancing their mutual interest in responding to the challenge of a rising China.

On the other hand, Abe faces a tricky political calendar in 2019, with local elections in April and elections to the upper house of the Diet in July, which will complicate Tokyo’s stance in the bilateral trade talks. Moreover, if Washington overreaches in its demands in the first phase of the talks, Tokyo can be expected to fall back on its traditional negotiating tactic of “rope-a-dope” in hopes of dragging the process out beyond the end of Trump’s term.

Q3. What are the prospects for an early U.S.-Japan deal?

A3. Not great. Trade negotiations always take longer than expected, encountering unforeseen obstacles in the negotiating room and in domestic political debate. A deal between the world’s first- and third-largest economies — ones with as much historical baggage in their trade relationship as the United States and Japan have — will inevitably be complex and take time. The discussions over auto trade will be especially charged. And now that the door has been opened, other U.S. industries, from pharmaceuticals and medical devices to financial services, are likely to push for more contestable markets in Japan.

For its part, the Japanese government is likely to resist the kind of managed-trade outcomes seen in Trump’s other deals to date. The Ministry of Economy, Trade, and Industry (METI) can be expected to object to quotas on Japanese auto exports to the United States, while the Ministry of Finance will fight tooth and nail against the inclusion of currency disciplines in the trade deal, even merely procedural ones like those in USMCA.

Another reason to expect a protracted negotiation is domestic politics in the United States. Whether in connection with a Japan deal or otherwise, a Democratic-led Congress is likely to push back hard against anything President Trump wants to do on trade (even if many Democrats secretly sympathize with some elements of his agenda). Moreover, there are significant questions about the “architecture” of the U.S.-Japan deal: will Congress insist that the Trump administration deliver a comprehensive FTA addressing all negotiating objectives, including ones that have little relevance for U.S.-Japan trade such as labor and environment standards? And will Congress be willing to pronounce twice on a Japan deal, as implied by the two-stage process laid out in the September 2018 joint statement? With questions like these outstanding, this is unlikely to be a simple 90-day negotiation.

Mr. Matthew P. Goodman is senior vice president and holds the William E. Simon Chair in Political Economy at CSIS. Follow him on twitter @MPGoodman33. Ms. Ann Listerud is a research associate with the CSIS Simon Chair in Political Economy. This piece first appeared as a CSIS Critical Questions here

Matthew P. Goodman

Matthew P. Goodman

Matthew P. Goodman is senior vice president and William E. Simon Chair in Political Economy at CSIS, with particular emphasis on Northeast Asia.

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