Two Roads Ahead For U.S.-Japan Trade Talks

By Daniel Sneider : Lecturer, International Policy at Stanford University
April 16,2019
Daniel Sneider
Lecturer, International Policy at Stanford University


 

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(Photo by Rodrigo Garrido/Reuters)

When Japan’s top trade negotiator Motegi Toshimitsu meets his American counterpart, Robert Lighthizer, this week in Washington, to begin Japan-U.S. trade talks, there are two possible roads that the two men can take.

One road is a freeway leading to a quick deal, one that can be reached even as soon as later this month when Prime Minister Abe Shinzo is scheduled to head to Washington for his own meeting with President Donald Trump. The second road is a slower path along a longer route to a deal, perhaps, somewhere farther down the road.

The first road is faster, but more dangerous. The second is slower, but perhaps safer, although to be honest, there is no really safe road when you are driving in Trump Country.

Before we describe these two roads, it is important to set out the current state of trade discussions between the two countries. The reality is that since a joint declaration was issued between the U.S. and Japan last September declaring the start of negotiations, there has been no movement towards talks.

The April 15-16 meeting in Washington marks the first time that Motegi and Lighthizer will actually sit down and begin to shape what an agreement might actually look like.

The talks were first delayed by the government shutdown in the U.S. But even under the best circumstances, Japan is low on the list of priorities facing U.S. Trade Representative Lighthizer. He has been managing a series of more important trade issues – beginning with still pending Congressional passage of the replacement for the North American Free Trade Agreement (NAFTA).

Talks with Europe on a broad trade pact are also high on the agenda. But most of all, the negotiations with China absorb the attention of USTR and Trump himself. Those talks are reportedly making progress but a quick deal, which has been repeatedly reported, has yet to be realized.

At this moment, “the Americans are still dedicating all their efforts to conclude the negotiations with China,” Brookings Institution East Asia economy expert Mireya Solis told me. “Motegi and Lighthizer will use their first meeting to define the scope of the bilateral talks,” she predicts.

"My sense is that Bob [Lighthizer] is pretty much completely engaged with China at the moment," trade guru Clyde Prestowitz, a former USTR negotiator with close ties to Lighthizer, agrees. "I doubt he's had time to really think through the Japanese discussions."

The Abe administration keeps insisting that this is a negotiation on a “Trade Agreement on goods (TAG),” hoping to avoid describing this as a broad, bilateral Free Trade Agreement that covers everything from tariff issues to services, even currency questions. The Trump administration just as clearly dismisses that term – and points out that the September statement makes clear that this will cover “other key areas including services.”

Despite his claim, Abe has already conceded to the concept of a broader agreement that could include issues such as customs procedures and even currency levels. The question to be answered is what does Japan get in return.

The big issue for Tokyo is to remove the Trump threat to impose 25 percent tariffs on automobile exports to the U.S., on national security grounds, under Section 232 of the Trade Expansion Act of 1962. Another goal is to remove the tariffs on steel and aluminum that Japan has been under since last year.

Japan has some crucial leverage with Trump. The administration is under mounting pressure from agricultural producers and their representatives in Congress. Meat producers are rapidly losing market share to competitors from Canada, Australia, New Zealand and elsewhere since the new Trans-Pacific Partnership agreement, the TPP-11, went into effect on January 1. Canadian beef exports to Japan tripled and Japanese imports from the TPP countries has grown by 60 percent.

There is also the impact of the Japan-EU partnership agreement which also reduces tariffs for European exports of wine, cheese and other products to Japan. Lighthizer told a congressional hearing recently that he felt "a great urgency over negotiations with Japan" as the TPP and EU partnership deals take effect.

In the September joint statement, the Japanese government very cleverly linked a readiness to an agreement that would increase jobs in the auto sector in the U.S. to an agricultural deal in which the TPP and EU agreements would set the “maximum level” for access to Japan’s market. For Japan that means they are ready to give the U.S. the same concessions – but not more – that they have given to the TPP members and Europe.

The Fast Road to a Trade Deal

This has led to some speculation that Lighthizer might seek an early agreement on agricultural market issues, leaving the rest of the issues to be negotiated later. There is a political logic for this on both sides - for Trump it would be to claim a clear and visible 'victory' of great utility in certain states such as Iowa.

Abe has his own domestic politics to worry about - an election for the Upper House of the Diet in July, or even possibly a double election that would include the entire lower house. Given the relatively positive outcome of the local elections so far, Abe may not feel as much pressure now for a double election. But he is still facing difficult circumstances politically.

The Japanese economy is slowing down, largely due to the slowdown in China, and when the first quarter numbers are released in May, they may show an end to the long period of growth in Japan. Abe's efforts to produce a diplomatic triumph with a territorial and peace treaty deal with Russia are looking increasingly daunting due to Moscow's tough position.

So, a lot may hang on a planned Trump visit in late May, where he will be the first foreign leader to be received by the new Emperor. That would be followed by the G20 meeting in June hosted by Japan. Abe’s visit to the US later this month is intended to smooth the path toward the May visit and the G20 gathering.

These events seem to lend weight to the idea of an early deal on trade with the U.S. But the rules of the World Trade Organization bar a deal that focuses on only one sector like agriculture. And for Japan, if a deal does not include a lifting of the threat of auto tariffs, something that would have huge impact on the Japanese economy with clear political ramifications, there is little incentive to make such a bargain at this point.

Former White House trade and economic policy advisor Matthew Goodman, a respected expert on Japan trade, believes that a broader version of a quick deal is possible. Abe could offer Trump the same market access on agriculture as TPP and EU exporters and some gestures on the auto front such as relaxing regulations on certification of cars for the Japanese market.

This could be paired with increased purchases of U.S. natural gas and weapons so that Trump could point to gains on the bilateral trade imbalance. He might even allow some language on currency issues that is similar to the US-Mexico-Canada agreement.

This kind of fast road deal might have some attraction to American business interests – not only agricultural producers but also some in the auto industry who oppose the imposition of tariffs. And it could satisfy even those American firms who are more interested in other areas such as services, digital technology and trade, and health industries and who advocate a comprehensive agreement.

The slow road and the Trump problem

A fast road deal is not out of the question. The problem lies with Donald Trump who has a fixed idea about automobiles and wants to see a significant cut back in the level of Japanese auto shipments to the U.S., which are now at around 1.7 million cars a year. Trump wants to force a large shift in auto production to the U.S. – and is ready to set quotas for the level of Japanese auto exports, a defacto voluntary restraint agreement of the kind the Trump administration forced on South Korea for steel.

The Abe administration would love to come up with a deal that can satisfy Trump’s need to declare victory without undermining the Japanese economy, or Abe’s own political future. That means no additional access on agriculture than what is already given in TPP and no auto export restrictions.

“Japan's preferred outcome would be for the Americans to altogether forego 232 actions (very unlikely),” says Brookings’ Solis, “and they are bound to reject quotas that reduce their exports to the U.S.”

That may mean a slower path to negotiation, one that does not initially involve Trump. Neither Motegi or Lighthizer are eager to bring the Japan trade talks to a level that will get the attention of President Trump, which brings with it all sorts of unpredictable and uncontrollable elements.

"I think Lighthizer and Motegi have a common concern which is to keep things below the Trump radar," says Prestowitz. Lighthizer is already struggling to keep Trump from blowing up the talks with China and is not eager right now to also have to deal with Trump when it comes to Japan.

That may not be easy. “Lighthizer isn’t interested in Japan and would do a deal today if he could,” says Goodman. “But of course, it’s up to Trump, and he’s got such a bee in his bonnet about cars that he may not take what I still think would be a good deal.”

Any deal with Trump is perilous. The unstable American president has been threatening to impose tariffs on Mexico over immigration policy, ignoring promises he made in the new NAFTA pact. Trump, in short, cannot be trusted to keep his word. Whether it is a fast road or a slow road, Abe is facing some difficult choices in the coming weeks.