Media  Global Economy  2018.08.28

How can Japan-U.S. FTA talks be avoided? - A search for a way to escape the beef-or-automobiles dilemma

The article was originally posted on Webronza on August 14, 2018

The first round of Japan-U.S. trade talks were held between Japan's Minister of Economic Revitalization Toshimitsu Motegi and U.S. Trade Representative Robert Lighthizer for two days starting on Aug. 9. The next round is planned for September, and a summit between the leaders of the two nations is scheduled to be held later that month.

From Japan's perspective, there are two issues in the Japan-U.S. trade negotiations. The first is access to the Japanese market for U.S. agricultural products, and in particular, how Japan will deal with U.S. demands for lower tariffs on beef. The second is how to avoid moves by the U.S. to raise automobile tariffs by citing national security as the reason. The following is an explanation of these issues.

The U.S. will pressure Japan to sign an FTA with the aim of lowering beef tariffs

The concern that the Japanese government has is this: "The U.S. will seek negotiations over a Japan-U.S. free trade agreement (FTA), which will make it easier for the U.S. to apply pressure, rather than return to the Trans-Pacific Partnership (TPP). In that case, the U.S. may demand that Japan lower beef tariffs and take other steps on top of the concessions Japan already made to the U.S. in TPP talks. This situation must be avoided at any cost."

There were some news reports that such concerns have subsided because Lighthizer did not use the phrase "Japan-U.S. FTA" but "bilateral" in the latest talks, but that view is incorrect.

The World Trade Organization (WTO) requires that nations treat other member nations equally, and there is a principle that tariffs against a specific country cannot be lowered more than those against other nations. This is called the most-favored-nation treatment principle.

However, if nations sign an FTA, then they are allowed to lower tariffs for participants of the agreement compared to other nations, as an exception to this principle. This is the only way for Japan to lower tariffs just for the U.S. In other words, if the U.S. wants to lower tariffs on U.S. beef from the normal 38.5%, it would have to sign a Japan-U.S. FTA (or return to the TPP, which is an FTA, too).

If the current situation continues, beef will be bartered for automobiles

Regarding automobiles, under an agreement reached by U.S. President Donald Trump and European Commission President Jean-Claude Juncker, high automobile tariffs will not be applied while the U.S. and EU negotiate the mutual abolition of tariffs on goods other than automobiles. As such, there were concerns in Japan that high tariffs would not be applied to the EU because the two sides are in negotiations while high tariffs are applied to Japan, similar to the early stage of the case with the raising of steel tariffs (at present, high steel tariffs are applied to the EU).

The Asahi Shimbun reported on Aug. 12 that a Japanese government official is hopeful that if an agreement is reached at the Japan-U.S. summit in September and the two sides enter into negotiations over specifics, then Japan will be able to win a freeze on tariffs during negotiations. However, this Japanese government official's remark contradicts the Japanese government's wish to avoid Japan-U.S. FTA talks. (Unless the U.S. and EU hold talks on abolishing tariffs, and that leads to an altruistic outcome in which all WTO members enjoy the results of the talks,) any effort by the U.S. and EU to mutually abolish tariffs means holding FTA negotiations. The U.S. and EU have previously suspended Transatlantic Trade and Investment Partnership (TTIP) talks, so they would resume those negotiations.

Similarly, the "talks" mentioned by the Japanese government official would theoretically be none other than Japan-U.S. FTA talks. In that case, since Japan has already abolished tariffs on many industrial products, in order for the U.S. to realize the "reciprocal" trade that Trump seeks, Japan would have to lower beef tariffs. There is no guarantee that Japan's concessions to the U.S. in TPP talks will settle this matter.

Once the U.S. applies automobile tariffs against Japan, Japan would have to concede on goods such as agricultural products in order to get the automobile tariffs removed. This means that in order to avoid high automobile tariffs, Japan would have no choice but to enter bilateral FTA talks with the U.S., which will lead to such an outcome.

If the current situation continues, beef may end up being bartered for automobiles.

The "biggest adversary" of the U.S. is China

To begin with, why were Japan-U.S. trade talks held at this time?

It is unthinkable that Japan will seek negotiations since it is the one on the defensive (however, it is possible that Japan did what it thought the U.S. wanted). Meanwhile, there have been reports that the governments of both sides barely conducted preparatory meetings by governmental officials normally preceding the ministerial meeting and were not even able to hammer out the topics for discussion because Lighthizer and the rest of the USTR staff are busy conducting negotiations with countries such as Mexico.

Why, then, did the U.S. try to negotiate with Japan?

One possible reason is that it was part of the U.S.'s efforts to repair relations with its allies. Trump took an antagonistic stance toward European nations during his visit to Europe, while speaking unusually highly of Russian President Vladimir Putin, whom the American public considers the enemy. This resulted in a strong backlash at home, including from Trump's own Republican Party, so the U.S. government moved to change course. The agreement with the EU's Juncker in July is a manifestation of this shift, and the U.S. probably tried to do the same thing with Japan.

The second possible reason is that the U.S. hopes to make friends in its trade war with China. The Chinese actions that were the grounds for the U.S. raising tariffs against China, such as intellectual property infringement and demands for technology transfers when making investments, are actions that the U.S. can address jointly with the developed nations of Japan and the EU. And related to what I mentioned earlier, the U.S. can show the American public that Japan and the EU are allies of the U.S. in terms of U.S.-China relations.

The U.S.'s raising of tariffs against China faces strong objections, mainly from the agricultural industry. However, it is widely believed in the U.S. that the U.S. economy faces pressure from Chinese activities regarding advanced technologies and intellectual property as well as the large trade deficit with China, or that this is becoming a threat not just economically but also in terms of national security.

A Gallup public opinion poll in July 2018 found that 71% of Republican Party supporters and 57% of Democratic Party supporters see China's trade policies as unfair, both very high numbers, while just 21% and 38%, respectively, believe that the policies are fair.

Meanwhile, fewer people hold the view that Japan's economic activities are a threat. The same Gallup poll found that 41% of Republican supporters and 27% of Democratic supporters see Japan's trade policies as unfair, both low numbers, while 46% and 65%, respectively, say that the policies are fair.

So for America's trade policy, China is now the "biggest adversary."

The midterm elections are the top priority

The biggest reason that the U.S. held trade talks with Japan at this time is to have something to show voters ahead of the November midterm elections.

The EU and the U.S. reportedly agreed that the EU will expand imports of U.S. soybeans, but this is simply a description of the fact that the EU's imports of U.S. soybeans are growing reflexively because China raised tariffs on U.S. soybeans, which resulted in Brazilian soybeans going to China instead of the EU. The EU already has zero tariffs on soybeans and does not have state-owned trading companies, so the EU does not have the means to intentionally boost U.S. soybean imports as a policy. So this is actually a form of "fake news," but Trump has touted it as an accomplishment in a rally attended by farmers. (A senior official of a soybean industry association commented coolly that this agreement falls short of the big loss in the Chinese market.)

Given that Trump praises a step this small as an accomplishment, perhaps he would be satisfied with just an expression of an effort to improve access to the Japanese market for American agricultural products. Making an insignificant thing seem like a significant thing may be a skill in diplomacy.

Furthermore, not only would the raising of automobile tariffs impact the U.S. automobile industry, a trade war with China would deal a major blow to the U.S. automobile industry (please refer to "The Japanese and US automobile industries will have a showdown in the Chinese market"). If the automobile industry's warning that major damage would result happens to reach Trump, then he would likely give up on raising tariffs, but if that does not happen, then he will probably tout the raising of tariffs ahead of the midterm elections. The outcome is unpredictable because it is up to Trump.

Japan on the defensive

The Japanese government is on the defensive on the issue of beef as well as automobiles. To ward off the U.S. attack, Japan will have to get the most that it can by offering increased imports of LNG or defense equipment or coordinated action against China on issues such as intellectual property.

However, if Japan agrees to hold FTA talks with the U.S., then there would be backlash from Japan's agricultural industry. That would impact the chances that Prime Minister Shinzo Abe will be re-elected as head of the Liberal Democratic Party for a third term. This is likely why Abe avoided reaching an agreement before the Sept. 21 LDP presidential election.

It is unclear how long the Japanese government can refuse a Japan-U.S. FTA beyond the U.S. midterm elections.

At present, pressure is not growing within the U.S. to have Japan open up its market for agricultural products. While it is true that current Japanese tariffs on U.S. beef (38.5%) are higher than those for Australia (29.3% for refrigerated and 26.9% for frozen beef), with which Japan has signed a Japan-Australia FTA, U.S. beef is not necessarily at a disadvantage in the Japanese market.

China's raising of tariffs against the U.S. led to higher prices for Brazilian soybeans. Similarly, increased shipments of Australian beef to China has led to higher prices, and as a result, lower prices for U.S. beef canceled out their disadvantage due to higher tariffs, so now shipments of U.S. beef to Japan are growing steadily. With large amounts of Australian beef now bound for China, the U.S. beef that has been shut out of the Chinese market is now heading to Japan, making up for the decrease in Australian beef.

So, for the time being, it is highly unlikely that the U.S. agricultural industry will become more fervent in its demand for a Japan-U.S. FTA.

However, this situation will change drastically if the U.S.-China trade war is resolved. Furthermore, the TPP, which has not yet gone into effect, will go into effect next year, or this year at the earliest. The 38.5% tariff on beef will gradually be lowered over 15 years to 9%. If the TPP goes into effect early next year, then beef tariffs under the TPP will be lower than beef tariffs under the Japan-Australia FTA in April next year, so Australian beef will be at a further advantage in the Japanese market.

The more time passes, the more the U.S. agricultural industry will be at a disadvantage, so pleas from the agricultural industry for relief will grow louder. The agricultural industry's calls to level the playing field will grow stronger, regardless of whether that means signing the TPP or a Japan-U.S. FTA. (Looking at this from another perspective, the more time is taken on Japan-U.S. FTA talks, it is the U.S. side whose negotiating position will worsen.)

And this will have an impact on Trump's re-election bid in 2020.

How can Japan escape the beef-or-automobiles dilemma?

To begin with, Trump only says that he prefers bilateral trade deals over the TPP, and he has never stated what the problem is with the TPP. The TPP has rules that cover most of the Chinese actions that the U.S. complains about, such as infringement of intellectual property and demands for technology transfers when making investments. For the U.S., returning to the TPP is the best choice for enforcing discipline on China (please refer to "Use the TPP to reform the WTO!").

As long as the U.S. returns to the TPP, then U.S. beef can compete with Australian beef under equal conditions. And the raising of automobile tariffs will hurt American automobiles as well.

I understand the U.S. desire to address China's infringement of intellectual property and demands for technology transfers. But raising tariffs against China to achieve those goals hurts America's industrial sector, the agricultural industry and consumers as well. If the U.S. and China impose tit-for-tat tariffs, third nations that export to each of those markets benefit (for example, Brazil benefitted from China's raising of soybean tariffs while Australia benefitted from the beef tariff increase).

Japan is not the enemy of the U.S. The best means to resolve the trade war with China is not tit-for-tat tariffs, but rather the TPP. I wonder how much the U.S. understands this.

The Japanese government has said that a return to the TPP, a multilateral framework, is preferable. But has it explained to the U.S. that doing so is also in the U.S.'s best interest?

In order for Japan to escape the current dilemma of having to choose between beef or automobiles, I believe that Japan needs to include relations with China and the Chinese factor into its bilateral relationship with the U.S.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on August 14, 2018.)