Media  Global Economy  2018.04.23

Catch Trump's trade policy in a "pincer movement": The Japanese government must not ask for an exemption from the increase of US tariff on steel and aluminum

The article was originally posted on Webronza on March 29, 2018

Start of a U.S.-China trade war

The Trump Administration is trying to destroy the result of decades of global post-war cooperation.

The World Trade Organization (WTO) rejected Section 301 of the Trade Act and other unilateral measures implemented by the United States in the 1980s, and decided that countermeasures must not be taken without first going through WTO dispute-settlement procedures. Now the Trump Administration is ignoring this decision by unilaterally imposing punitive tariffs on Chinese goods for violations of intellectual property rights. In response, China is set to counter this by imposing retaliatory tariffs on U.S. pork and other goods. A U.S.-China trade war is nigh. If this war exhausts both countries' economies, the impact will also have a significant effect on Japan.

Failure to exempt Japan from steel tariffs

At the same time, the Trump Administration has applied Section 232 of the Trade Expansion Act to raise steel and aluminum tariffs for what it considers to be reasons vital to national security. However, the other two countries of the North American Free Trade Agreement (NAFTA): Canada and Mexico, as well as the EU, South Korea, Australia, Argentina and Brazil have all been exempted.

The Japanese government, being an ally, requested an exemption from the U.S. government, which ended in complete failure.

The Minister of Economy, Trade and Industry SEKO said that the possibility of exempting quality items such as Japanese exports was still on the table, and that even if exemption was ultimately impossible, the impact to the Japanese economy would be small since U.S. industry had no choice but to buy Japanese products of high quality. This, however, is just sour grapes, because it would not have been necessary to negotiate any exemption in the first place if the United States had no choice but to buy.

South Korea is exempted while Japan is not, which would seem to imply that the United States regards Japan as a lesser ally than South Korea-a reality. That would cause great shock to those who have heretofore held that Japan-U.S. relations were a top priority. In a sense, this represents a failure of Japanese diplomacy.

The real intentions and logical inconsistencies of the United States

However, considering the countries that the United States has exempted from its proposed steel and aluminum tariffs, namely, Australia, Argentina and Brazil, it should be noted that these are all countries with which the United States enjoys a trade surplus. For the other exempted countries such as Canada, Mexico, the EU and South Korea, the United States does indeed have trade deficits, but is, in exchange for the exemptions, conducting on going trade negotiations with these countries in order to win some important trade concessions. It is obvious that the United States intends to conduct trade negotiations with countries with which it has trade deficits in order to win concessions to eliminate them.

As long as this is obvious, the Minister should not go as far as Washington seeking an exemption as he would simply be asked to return. On the other hand, though the EU will likely be exempted, German and French leaders have roundly criticized the United States' decision to raise steel and aluminum tariffs as a threat to free trade. This is a sensible response.

Besides, the Trump Administration's justification for raising tariffs for the purpose of national security is completely inconsistent because the criteria used to determine exemption has nothing to do with security. On top of this, steel imported from the exempted countries accounts for more than half of U.S. steel imports, calling into question the proposed effectiveness of the tariffs as a means to support the U.S. steel industry to begin with.

Possible countermeasures by the Japanese government

What can the Japanese government do?

First and foremost, the government must not to ask for an exemption. Even if Japan were exempted, steel from other countries unable to export to the United States would flood the global market and cause the global price of steel to decline, negatively impacting the Japanese steel industry. Further, such negotiations are premised on the justness of the United States' decision to increase steel and aluminum tariffs, which, to be clear, is utterly unjust and violates the provisions of the GATT and the WTO. As such, would be best to file a WTO complaint squarely. It is possible to win a complete victory. (Besides, some argue that Article 21 of the GATT can only be exercised in crises such as a state of war, but this argument is not supported in the text of the article and is false.)

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In case the United States refuses to withdraw the steel and aluminum tariffs, it is possible for Japan to take retaliatory measures on other items, which the WTO would recognize as legally legitimate.

The EU and China are intending to take countermeasures without going through WTO dispute-settlement procedures. This would be possible if the United States' decision to increase tariffs is defined not as a national security measure in a sense of Article 21 of the GATT but as a safeguard measure in a sense of Article 19 of the GATT. (Since the safeguard tariffs must be imposed on imports from all over the world, however, this definition has some problems.)

The barrier against such countermeasures, however, are those within the Japanese government that seem to follow an America First policy even more steadfastly than the United States, claiming that, such a move by the Japanese government would damage Japan-U.S. relations.

This is one-sided because even though Japan-U.S. relations are important for Japan's security, the United States does not seem to value its relationship with Japan as much as some within the Japanese government like to believe. It should now be loud and clear. Even if the United States regards Japan as an important country militarily, it has had a history of filing GATT/WTO complaints against Japan's trade measures since the Cold War era. Like the United States, Japan should make practical-minded responses separating its economic and political interests.

Possible countermeasures by Japanese companies

Private Japanese companies can also take countermeasures. Because of the increase in steel and aluminum tariffs, U.S. automobile, aircraft and beer keg industries that have to pay higher prices will be negatively impacted.

Trump Administration's Tariff Increase on Steel Imports and Economic Theory

Considering this, Japanese companies conducting production activities in the United States should file a suit to cancel the increase in steel and aluminum tariffs along with these affected companies in U.S. courts, on the basis that the U.S. government is unjustly applying Section 232 of the Trade Expansion Act. It would be possible to win this suit because a considerable number of countries have been exempted, and because the steel supply to the military industry accounts for only 3% of U.S. steel production. In this suit, companies suffering losses could ask the U.S. government for compensation.

Catch the Trump Administration in a "pincer movement" from both inside and outside

Attacked from both inside and outside the United States, the Trump Administration will eventually have no choice but to concede defeat. If Japan's actions can force the United States to backtrack and protect the free trade system, the world will regard Japan with reverence.

Meanwhile, the United States is trying to stop China from overproducing steel within an international framework but China shows no sign of stopping, drawing strong complaints from the United States. If the Trump Administration can persuade other countries to also echo such complaints about Chinese steel, including that which is imported through third countries, how about Japan, the U.S. and the EU cooperate in considering antidumping measures against Chinese steel etc.? That would help the position of the United States, which, as of now, is standing alone.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on March 29, 2018.)