A windfall for Japan? The U.S. and European plan to prevent the introduction of automobile tariffs - Japan is likely to benefit the most from a newly surfaced plan for the U.S. and Europe to avoid a conflict

The U.S. and Europe move to compromise

The U.S. and Europe have started to move to resolve their disagreement over automobile tariffs.

According to U.S. and European media, while the European Union searches for a way to avoid auto tariffs that the U.S. plans to introduce by working with interested nations (Japan, South Korea, Canada, Mexico, etc.) to conclude an auto tariff agreement with the U.S., the U.S. ambassador to the, Germany who is close to President Trump, has proposed to the leaders of major German automakers that the U.S. and the EU both eliminate their auto tariffs. (The Nikkei, July 6)

The Trump administration has questioned the difference between the U.S. auto tariffs of 2.5% and the EU tariffs of 10%. Although the EU has argued that its auto tariffs are not necessarily higher because the U.S. levies tariffs of 25% on models such as pickup trucks and vans, it apparently has begun to think that it needs to compromise in one way or another to resolve the trade dispute with the U.S.

However, the U.S. may be reluctant to eliminate tariffs on pickup trucks, which are very important for its domestic auto industry. As such, this proposal is unlikely to be realized, according to The Nikkei.

What is a plurilateral agreement?

The EU is considering what is called a "plurilateral agreement," in which certain countries participate only in certain fields.

In the past, in multilateral trade negotiations under the General Agreement on Tariffs and Trade (GATT), there have been instances in which plurilateral agreements have been signed, such as over trade rules (e.g., an agreement on standards and certification, which are a form of non-tariff barrier, in the Tokyo Round) and government procurement (the Uruguay Round, etc.) (At the Uruguay Round, with the exception of matters such as government procurement, all participating nations accepted the agreement as a whole, including market access such as tariffs, rules and disciplines on standards, subsidies and other matters, and the new field of services. This is known as a "single undertaking.")

However, in the negotiations over tariffs on goods, as long as the final and legal agreement, aside from the process of negotiations, is concerned, all countries submitted documents that made commitments on tariff reductions ("Schedules of Concessions") without limiting the fields that are covered, in order to reach a final agreement on free trade. The general rule was, "all member nations participate in all fields."

But the World Trade Organization (WTO), which was established in 1995 as the successor to GATT, was composed of a large number of members in differing stages of economic development and with conflicting interests, and India and China -- which see themselves as representatives of developing nations -- held greater sway. This led to the end of the traditional approach in which a proposal hammered out mainly by industrialized nations such as the U.S., EU and Japan served as the basis for the document to which all participants agreed. That is the reason why there was no choice but for nations sharing ambitious targets in specific fields to participate and reach an agreement by themselves not just over rules, but also over tariff negotiations (a single undertaking became difficult to achieve).

It was under these circumstances that a plurilateral agreement was reached, namely the WTO's Information Technology Agreement (ITA) that eliminates tariffs on digital products.

Non-participants are "freeloaders"

Of course, if the U.S. and EU conclude a free trade agreement (FTA) that covers all fields, then tariffs would be eliminated for many products, not just autos, between the two sides. They likely decided to consider a plurilateral agreement on auto tariffs because inking an FTA would take considerable time.

However, even a plurilateral agreement comes under the WTO's most-favored-nation treatment principle, which states that countries must apply the same tariffs and rules to all nations. (Legally speaking, ITA participants took the procedure of revising their Schedules of Concessions on a most-favored-nation basis submitted to the WTO.)

For example, if participants of the plurilateral agreement (Japan, the U.S. and the EU) agree to eliminate auto tariffs, then they need to eliminate auto tariffs not just for participants of the plurilateral agreement, but also for all WTO members, including South Korea and China. So, nations that are not participants of the plurilateral agreement, such as South Korea and China, benefit from the elimination of auto tariffs by Japan, the U.S. and the EU, even if they do not eliminate their own auto tariffs. This can be said to be a form of "free rider."

In fact, FTAs such as the Trans-Pacific Partnership (TPP) are exempted from the most-favored-nation treatment principle of GATT/WTO, so treaty participants do not need to apply the contents of the agreement to non-participants, but this is not the case with plurilateral agreements.

This is likely the reason why German Chancellor Merkel has said that she is prepared to enter talks on lowering tariffs with the U.S. while also stating that WTO rules should cover nations besides the U.S. (Auto tariffs of the U.S. and the EU will be listed as zero in the Schedules of Concessions submitted to the WTO.)

Japan will be the "biggest beneficiary"

Under the Japan-EU FTA, the EU's auto tariffs are to be eliminated over eight years, so if the plurilateral agreement proposed by the EU calls for eliminating tariffs over a shorter span, then Japan would benefit from that plurilateral agreement.

Japan would gain an advantage in the U.S. market. In the TPP negotiations, due to strong objections by the U.S. auto industry, the treaty spelled out eliminating the 2.5% tariff on passenger autos gradually over 25 years and the 25% tariff on such models as pickup trucks would be maintained for 29 years and finally be eliminated in the 30th year. But this agreement is no longer valid because the Trump administration withdrew from the TPP. If the U.S. eliminates its tariffs under the plurilateral agreement, then the Japanese auto industry would benefit greatly.

The important point is that Japan would benefit through the WTO's most-favored-nation treatment principle even if it does not participate in the plurilateral agreement. Of course, even if it did participate in the plurilateral agreement, Japan's auto tariffs are already zero, so it would not have additional obligations. Japan would benefit regardless of whether it participates or not.

So, Japan could end up being the biggest beneficiary of the EU's proposal. On the other hand, that could be the biggest hurdle for the EU proposal. Another possibility is that consideration of this development prompts the U.S. and the EU to kick-start their Transatlantic Trade and Investment Partnership (TTIP) negotiations, which are currently stalled.

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(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on July 12, 2018.)