Media  Global Economy  2018.10.23

An urgent review of the Japan-US summit meeting on trade

The article was originally posted on Webronza on September 28, 2018

The term "TAG" popped up

I happened to be in the US when the media reported on the recent Japan-US trade negotiations. I was staying in the US for reasons unrelated to the bilateral talks. Let me give a quick review of these talks.

Above anything else, many readers must have been puzzled by the term "trade agreement on goods" or TAG, which popped up out of nowhere.

The Japanese government had made it clear both internally and externally that it cannot make any further moves or concessions on agricultural products than it did in the TPP. As such, it had maintained that it would not enter into negotiations for a Japan-US free trade agreement (FTA). Tokyo feared that in such bilateral talks, the Trump administration would likely exert more pressure than it did in the negotiations for a TPP and demand that Japan do more to cut tariffs or even remove them altogether.

In the latest agreement, however, Tokyo says it will enter into negotiations for a "Japan-US TAG." In short, Tokyo says no to talks for a Japan-US FTA but yes to those for a Japan-US TAG. In either case, however, there will be bilateral negotiations.

The Japan-US joint statement proclaims that there will be no commitment to concede more than what has been agreed in the TPP negotiations as far as agricultural products are concerned. Whether it is called a Japan-US FTA or a Japan-US TAG, its content is the same. In a sense, the term "Japan-US TAG" is just a smoke screen designed to soothe Japan's agricultural industry. It is a just a temporizing measure by Japanese government officials. The official who first devised this cunning trick may deserve praise as a government official.

Precisely speaking, world trade was governed by the General Agreement on Tariffs and Trade (GATT) until its successor, the World Trade Organization (WTO) was established. GATT was an agreement on goods. Therefore, any free trade agreement under GATT is none other than an FTA on goods to the exclusion of services and investment; it is none other than a TAG, a term that appeared out of nowhere in the joint agreement. Free trade agreements in the world generally started off as deals on goods and eventually expanded their scope to include services and investment just as an appendix in the face of changes in trade or economic conditions. Nothing more.

Prime Minister Shinzo Abe and others in the administration must have given high marks to the effort of the Japanese government officials who found the term "trade agreement on goods (TAG)," a phrase not used by anyone else in the world.

Japan ended up yielding to the threat of the US raising auto tariffs for the benefit of US national security, unjustifiable and inconsistent on WTO principles. Concluding an FTA that includes agricultural products means making concessions to the US to an extent comparable to the TPP. Beef will be bartered for automobiles.

Had Japan taken a firm stand, the US would likely have made a desperate request that Japan lower tariffs on agricultural products as the US faces unfavorable treatment compared with Australia regarding such products by TPP's coming into effect. This is a real disappointment.

Barking at China from out of range

Putting the US at a disadvantage in access to the Japanese agricultural market compared with Australia and other farm exporters must have been the only way to press the US to rejoin the TPP. Whether under an FTA or TAG between the two countries, if Japan treats the US on par with Australia and other exporters in terms of agricultural products, the US under Trump will not return to the TPP.

The current trade war between the US and China stems from the latter's unfair practices in such areas as intellectual property rights, state-owned enterprises, and investment. If the US had rejoined the TPP, a pact that introduces a higher level of discipline than WTO in these areas, it could have gained an effective tool to deal with China.

If the TPP had included the US and eventually expanded to involve the UK, South Korea, and Thailand to form a huge economic and trade sphere, China might have had no choice but to join the TPP, or at least the US could have demanded that the TPP discipline be the standard for WTO. Raising tariffs alone will not force China to make concessions in these areas.

The part of the Japan-US joint statement that has been written with China in mind just enumerates problems; it lacks substance and content when it comes to effective means to address them. It is just like barking at China from out of range.

To what extent did Mr. Abe and the negotiating team of the Japanese government really stress to the US counterpart how important the TPP is for the US, a country fighting a trade war with China (please refer to "How can Japan-U.S. FTA talks be avoided?")? This, too, is disappointing.

Is Japan's auto industry the winner?

The point Japan has won may be Washington's promise not to raise auto tariffs while negotiations are underway as in the case of the EU, although this is not clear from the text of the joint statement and may become the cause of a future dispute.

Tariffs on Japanese auto exports to the US will not be raised in the meantime. Tariffs on Japanese auto exports to China are only 15 percent while those on US autos are 40 percent because of the US-China trade war. As a result, the US auto industry will lose a growing and expanding market in China and eventually decline while the Japanese counterpart will fill the void in the Chinese market. Japan's auto industry may be the winner under the trade policy of the Trump administration.

However, in the Japan-US joint statement, it is stated that for the United States, market access outcomes in the motor vehicle sector will be designed to increase production and jobs in the United States in the motor vehicle industries. The US tries to pry open the Japanese market for its auto industry. Japanese tariff on autos is, however, already zero. Even if there will be further deregulation on auto imports, US auto export will not increase very much as long as Japanese consumers are unwilling to buy US autos. I am afraid that this will cause the repetition of Japan US trade talks in 1980s to 1990s when the Japanese government was forced to make commitments on the market share of foreign products in the Japanese market which was mainly determined by the activities of private companies. USTR Lighthizer was a negotiator at that time.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on September 28, 2018.)