Media  Global Economy  2017.11.06

Trump's Visit to Japan and a Japan-US FTA: A Range of Options for Talks with the US, from the best to the worst

The article was originally posted on Webronza on October 20, 2017

Japan-US rivalry over a bilateral FTA

US Vice President Mike Pence reportedly showed strong interest in a free trade agreement with Japan (Japan-US FTA) when he met with Japanese Deputy Prime Minister Taro Aso during the U.S.-Japan Economic Dialogue on October 16.

A Japan-US FTA is being pushed most by the agribusiness community in the US. The US Secretary of Agriculture Sonny Perdue has stated that he is eager for such an FTA. Behind his statement are the on-going, Japan-led negotiations toward a Trans-Pacific Partnership without the US (TPP 11).

If the TPP 11 is put in place, the US will have to pay a tariff of 38.5% in order to export beef to Japan while Australia will have to pay a tariff of only 9%. The same thing will happen with wheat, pork, wine, butter, and cheese. US agricultural products will be ousted from the Japanese market, and associated jobs will be lost. If Japan concludes a free trade agreement with the EU - a major exporter of wine, pork, cheese, pasta, etc. - US agricultural products will be placed in a critically disadvantageous position in Japan.

In short, the US agribusiness community shares the same concerns that I raised when I argued for a TPP without the US. These concerns will dissipate if Washington returns to the TPP. That was the aim of my argument. The purpose of the TPP 11 negotiations is to influence the US to rejoin the TPP.

It is not easy, however, for the US to rejoin now that President Trump has declared withdrawal from the TPP. Washington wants instead to conclude a Japan-US FTA so as not to put agricultural products from the US at a disadvantage.

The Japanese government and the agricultural interests in Japan do not accept a Japan-US FTA; they are worried that Washington will demand lower tariffs than in the TPP or even their removal. President Trump's scheduled visit to Japan on November 5, just before the APEC Economic Leaders' Meeting, must be a headache for Japan's Ministry of Foreign Affairs (MOFA). Placing an unwavering premium on Japan-US relations, MOFA must be perplexed at the prospect of President Trump's demand for a Japan-US FTA.

A range of options

Japan has the following range of options, from the best to the worst.

The best option is to refuse a Japan-US FTA and call on President Trump to return to the TPP. This demand will most likely offend him, but Tokyo must stick to its principles as a sovereign nation and take a firm stand.

Tokyo must convince him that a Japan-US FTA is undesirable, based on the following two-tier logic. First, TPP has been defined as one of the initiatives aimed at achieving a free trade area for the whole Asia-Pacific Economic Cooperation (APEC) region, i.e. the Free Trade Area of Asia-Pacific (FTAAP). This is the course APEC leaders have committed themselves to. Veering off it would go against this commitment. Second, the accumulation of bilateral FTAs will result in multiple rules and regulations becoming entangled with one another. Jagdish Bhagwati, a renowned scholar of international economics, brands this phenomenon the "spaghetti bowl effect." A mega FTA - a free trade agreement that involves many countries and territories like the TPP - has the major advantage that the rules and regulations will be unified among the many parties.

Tokyo just needs to stick to this logic. It is the US that is now in a weak bargaining position. It is also the US that has put itself into such a situation by withdrawing from the TPP. Tokyo just needs to wait for Washington to say that it wants to rejoin the TPP.

The worst option for Tokyo is to conclude a Japan-US FTA whose terms are on par with those of the TPP. This seems to be the most likely option that Tokyo will take under pressure from both Washington and the agricultural interests in Japan. But this option is the worst one.

TPP 11 negotiations assume that the US will rejoin the TPP eventually. Vietnam has been reported as being reluctant toward a TPP 11 as it made concessions in its regulations on state-owned enterprises in exchange for greater access to the US textile market. However, Vietnam's concerns will be dissipated if the US rejoins the TPP; after all, a TPP without the US is a trick to persuade the US to join. This has long been my point, and Tokyo must have convinced Hanoi based on it. Should the assumption that the US will rejoin break down, the framework of TPP 11 negotiations could also be undermined.

Changes to the terms of the TPP that a Japan-US FTA would entail

If Japan concluded a bilateral FTA with the US, the terms of the TPP would also need to be revised.

A case in point is the beef safeguard for Japan under the TPP. This safeguard will allow Japan to raise its tariff on beef imports if they exceed the specified amount, in exchange for reducing its beef tariff. This specific amount includes imports from the US as well as those from Australia, a party to the ongoing TPP 11 negotiations.

Japan has been refraining from negotiating the reduction of this safeguard trigger quantity under the assumption that the US will rejoin the TPP. If this assumption did not stand, Japan might not be able to implement the safeguard even though imports from Australia double. (Specifically, the beef tariff, set at 27.5% for the first year of the TPP, will be raised to 38.5% if total beef imports exceed 590,000 tons from the TPP member countries. Total beef imports for fiscal 2016 amounted to 530,000 tons, of which 490,000 tons came from the US (210,000 tons) and Australia (280,000 tons). Double the imports from the latter would still fall short of the safeguard trigger quantity.)

Tokyo might open a Pandora's Box if it broaches the idea of modifying the terms of the TPP. Hanoi would insist on nullifying the concessions it made in the state enterprise sector. Other countries would also demand to change the already-agreed terms. In that case, the ongoing TPP 11 negotiations, aimed at reaching a broad agreement at the APEC Economic Leaders' Meeting on November 10, would go astray. Worst of all, trust in Japan, which has been leading the negotiations, would all be lost.

Yet another best option

Yet another best option for Japan would be to start negotiations for a bilateral FTA with the US and abolish all its import tariffs on agricultural products.

Were the tariffs on agricultural goods such as rice to be abolished altogether, Japan could not maintain domestic agricultural prices that are higher than international prices. Also, it could not maintain the policy of reducing the acreage under cultivation that costs taxpayers and consumers 1 trillion yen in total or 10,000 yen per capita. Tariff abolishment would free Japanese consumers from the shackles of having to shoulder the burden associated with the country's agricultural policies; it would also open a new door for Japan's agriculture. Full-time farmers who would be negatively affected could be compensated directly by the government. This direct payment system, which has been adopted in the US and the EU, is a prescription recommended by economists all over the world. The system could be financed by the acreage reduction subsidy currently paid to farmers, totaling 400 billion yen. If the Japanese government was determined to protect agriculture with this system, the safeguard mechanism described would not be necessary.

Such a Japan-US FTA would result in Japan treating the parties to the TPP more unfavorably compared with the US. This in turn would necessitate the abolition of tariffs in the TPP as well. Australia, Canada, New Zealand, and other TPP parties would clearly welcome the tariff abolition initiative by Japan. It would take several years to conclude such a Japan-US FTA. Incorporating such a pact into the TPP after President Trump leaves office would result in an improved TPP that also incorporates the US.

There is a silver lining, however slight, even under the Trump administration.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on October 20, 2017.)