Media  Global Economy  2018.11.30

Don't be afraid of the US in Japan-US trade talks - The US wants an early deal. Time is on Japan's side.

The article was originally posted on Webronza on November 8, 2018

The midterm elections highlight social division in the US

The US midterm elections went as expected. Despite strenuous rallying efforts by President Donald Trump and the rest of the Republicans, the Democratic Party won the House of Representatives while the Republican Party retained a majority in the Senate.

In the final phase of the elections, a number of events occurred that symbolized the division in American society. Explosives were sent to the residences of some executives and supporters of the Democratic Party, including former US President Bill Clinton and renowned investor George Soros. An anti-Semitic man opened fire on a congregation at a synagogue in Pittsburgh, causing many casualties.

Trump commented that American society should come together, but he came under fire by the media, who questioned who had been making remarks that fuel social division in the first place. Trump rebuked them, saying it is fake news by the media that incites social division. There are no signs of a compromise in sight. Trump visited the Pittsburgh synagogue to pay tribute to the victims, but the Pittsburgh mayor refused to accompany him and a rally was held to protest against his visit.

The Pittsburgh incident could have dealt a serious blow to the President and the ruling Republican Party. But it did not significantly affect the staunch approval ratings for President Trump, which political analysts say will not dip 40 percent. While Trump talks as if to inflame social division, social media, which is increasingly undermining traditional mass media, is now sharing anti-Semitic and white supremacist views that could not have been expressed openly before. This is fostering solidarity among people who emotionally support such views.

What were the campaign agendas of the Republican and Democratic parties?

Trump stressed the issue of immigrants in the closing days of the midterm elections.

Trump repeated unfounded remarks that criminals and Islamic extremist terrorists are among the Latin American migrants marching in droves toward the US. He even dispatched troops to the Mexican border to block the migrant caravan (Trump said the troops would not hesitate to open fire if the migrants throw stones at them, although he retracted this remark later). As in the presidential election two years ago, Trump's actions excited those who believe that immigrants are undermining social stability and public security in the US.

The Democrats broke the tradition whereby former presidents refrain from current political commentary when Barack Obama appeared on the frontline of the campaign for the Democrats. Also at the forefront of the campaign was Senator Bernie Sanders, who once cornered Hillary Clinton in the Democratic primaries. He asserted that all the Trump administration and the Republican Party are doing is to put the wealthy few first. Sanders called for maintaining and scaling up Obamacare, an affordable health insurance program that Trump is trying to ditch. He thus appealed for support from young people, who are increasingly anti-capitalism since the financial crisis triggered by the collapse of Lehman Brothers, as well as from people who have to rely on financial support from the government for survival.

Trump's trade policy will not change

The election results reflect the deepening social division. The Democrats, who won a majority in the House of Representatives, are expected to step up pressure on the Trump administration.

The Democrats have ample ammunition to do so. The alleged collusion between President Trump and Russia known as Russiagate, allegations of tax evasion when he was young, alleged sex scandals...the list goes on.

The House of Representatives has the power to impeach the president. It is unlikely that Trump will be kicked out of office since that would require a two-thirds vote in the Senate. During the impeachment process, however, the Democrats will be able to step up pressure on the President and thus undermine his power.

On the legislative and policy front, the Democrats will likely propose scaling up the health insurance program. They can argue that even if the bills to do so are rejected in the Republican-dominated Senate, they will win a Senate majority in the next election and pass such bills.

On the economic front, trade policy has not been an issue while the economy is growing and unemployment is significantly declining. In other words, trade policy could not have been an issue because, unlike Hillary Clinton who advocated TPP, many mainstream Democrats share Trump's protectionist views on trade.

The Trump administration's trade policy is unlikely to change, as I pointed out in my previous article titled "Trump will not change even if he loses the midterm elections." Rather than expecting any change in trade policy, we should brace ourselves against the heightened likelihood that the US Congress will ratify a protectionist agreement.

Do the results of the midterm elections have any implication for trade policy? The election results in the Rust Belt do. In the 2016 presidential election, the vote in this area, straddling some states in the Midwest, was a driving force for electing Trump. Note that the Rust Belt overlaps the Corn Belt.

Any criticism should be directed at the shift from multilateral negotiations to bilateral ones

Under these circumstances, what will be the shape of trade negotiations between Japan and the US that are set to start from the beginning of next year?

The media and opposition parties in Japan claim that the Japanese government has agreed to enter into negotiations on none other than an FTA (free trade agreement), something it has hitherto refused to do. They argue that what the government calls a TAG (trade agreement on goods) will indeed cover not only goods but also services as well, and that the US government has never used such a term in the first place.

This criticism is off the mark. A TAG is definitely an FTA under GATT or WTO, as I explained in my article "An urgent review of the Japan-US summit meeting on trade." Any criticism directed at the government should focus on the fundamental issue of why Prime Minister Shinzo Abe and other officials repeated remarks that Tokyo will not enter into bilateral negotiations for a Japan-US FTA.

Their stance of not entering into such negotiations should be interpreted to mean refusing any bilateral negotiation. They feared that bilateral negotiations will put Japan at a disadvantage as it has a weak spot in terms of national security and other aspects in relation to the US. They worried that Japan will be forced to further reduce tariffs on agricultural produce from the levels agreed on in the TPP. This was why the Japanese government demanded that the US return to the TPP, a multilateral agreement.

Whether it is called a Japan-US TAG or a Japan-US FTA, Japan has agreed to start bilateral negotiations on agricultural produce, which is in the category of goods. Any criticism against the government should be directed at its soft spot: why it has made a policy shift to a bilateral deal rather than the TPP, a multilateral framework for solving trade problems. Bilateral deals are problematic from the perspective of international economics. This is highlighted by the spaghetti bowl effect, in which numerous bilateral FTAs complicate trade rules.

Japanese government officials shied away from the self-contradictory term "FTA" and coined the term "TAG" instead. This drew criticism as there is a gap in interpretation between Japan and the US. In short, "the crafty schemers have drowned in their own scheme." At the same time, however, they may have succeeded in diverting the attention of the media and opposition parties from a drastic policy shift. In that case, the "fortunate error" may have brought a sigh of relief to them. They may deserve praise from Prime Minister Shinzo Abe.

Some fear that once the two countries enter into negotiations for an FTA that also covers the service sector, the US will make nasty demands, accordingly to the Asahi Shimbun on November 6. That will not happen. The service sector has already been covered in TPP negotiations with the US. I have not heard any report that negotiations on this particular sector were difficult. The Japan-US joint statement in September suggests that early achievements can be produced in the service sector.

Trump can't walk away from negotiations with Japan

What will become of Japan-US negotiations, then?

Most observers in Japan fear that the Trump administration will exert intense pressure on Japan. Their fear might be justified. Washington did so in the negotiations to revamp NAFTA with Mexico and Canada. US Secretary of Agriculture Sonny Perdue reportedly said that Washington will demand more market liberalization than the levels agreed on in the TPP. But their fear will prove wrong.

Trump, who succeeded as a realtor, succeeded as a negotiator as well in negotiations to remodel NAFTA because of his tough negotiation style. He threatened to raise auto tariffs substantially and took the stance of walking away from the negotiation table unless negotiating partners offer a satisfactory compromise. This strategy is analogous to the one a realtor often takes, showing a buyer some real estate he/she wants to buy, then threatening to end negotiations and sell it to someone else unless he/she offers a satisfactory price.

For Canada and Mexico, satisfying Trump was the only option to avoid a spike in auto tariffs. Cornered into a weak position, they just had to succumb to Trump.

Will this be the case with Japan-US negotiations as well?

A tough and dreadful negotiator. This is the common image of Washington for the ordinary Japanese. This may be true, but a way out can often be found if you put yourself in the shoes of the opponent to get an overall picture of the negotiations. You just have to pay attention to the objective situation the US finds itself in.

Neither Canada nor Mexico could fight back at Trump's threat to raise auto tariffs substantially. This will not be the case with Japan. The US proposed bilateral negotiations because it was forced to compete in Japan's agricultural produce market with other exporters to its great disadvantage. US producers of agricultural products will have to continue paying high tariffs. By contrast, access to this market will be guaranteed with low tariffs for certain farm exporting countries, including Australia, Canada, and New Zealand, all of which are parties to the TPP, as well as those in the EU, with which Japan has concluded an FTA. Therefore, the US wants an early bilateral deal with Japan. In short, time is on Japan's side.

Under these circumstances, Trump cannot take the strategy of walking away from the negotiations. This would put the US, as well as Japan, in a difficult position. With the TPP and the Japan-EU FTA set to take effect by the year's end and next February, respectively, the US cannot afford to make a demand that is politically unacceptable for Tokyo, that is, to reduce tariffs lower than the levels agreed on in the TPP. This would prolong the Japan-US negotiations, which in turn would delay the coming into effect of a bilateral deal, putting US agricultural produce in a disadvantageous position. In short, the US agricultural industry will lose the Japanese market after it loses the Chinese market. This would be like rubbing salt into a wound. The reported remark by US Secretary of Agriculture Sonny Perdue does not represent the views of the Department of Agriculture. It is more likely that he talked off the top of his head.

Washington is pressed for an early conclusion to negotiations

The trade war with China has already worn out the US agricultural industry. US soybean producers lost the Chinese market, to which over 60 percent of their exports were destined, after China raised tariffs on this No. 1 farm export commodity for the US. The gap was filled by Brazil and other soybean exporting countries.

Under the new NAFTA framework, Canada's dairy product market has partly been opened. But Canada and Mexico are still maintaining high tariffs on most US products that they have imposed in retaliation for the US's continued imposition of high tariffs on steel and aluminum. Among such high-tariff products is farm produce, which includes US dairy products in the Mexican market.

Additional substantial damage in the Japanese market as well would deal a serious blow to the US agricultural industry.

Washington just wants to reach a deal with Japan that is on par with the TPP. And it wants such a deal as soon as possible. This is evident in two passages in the Japan-US joint statement in September: "[...] Japan and the United States will respect positions of the other government: - For Japan, with regard to agricultural, forestry, and fishery products, outcomes related to market access as reflected in Japan's previous economic partnership agreements constitute the maximum level"; and "Japan and the United States will enter into negotiations [...] for a Japan-United States Trade Agreement on goods, as well as on other key areas including services, that can produce early achievements."

It is along these lines that US Trade Representative Robert Lighthizer calls for an "early harvest." The term "early harvest" is a jargon among trade officials that denotes the strategy of implementing agreements in the order they are made in the face of many contentious issues. The Japan-US joint statement suggests Washington's negotiating position of wanting to reach a deal on goods and services soon for an early implementation while setting aside the sectors for which negotiations will likely take time, such as intellectual property rights. The true intention of the US is to clinch a deal by next February if negotiations start in January.

Uncertain prospects have already dismayed farming voters in the Midwest, one of the greatest farming belts in the US. The number of farmers there may not be so large, but farm-related voters−including voters in the farm supply industry that provides farm machines, fertilizers, agrochemicals, and feed, as well as those in other industries involved in the processing, storage, and distribution of agricultural produce−are rather large in number. Although only the Congressional elections attracted media attention in Japan, the midterm elections also involved a gubernatorial election in most states. Many political analysts agree that the latter, rather than the former, sway the prospects of the next presidential election. In the gubernatorial elections that have just ended, the Democratic Party garnered more votes than before in the Midwest states that overlap the Rust Belt and the Corn Belt, where Trump won in the presidential election two years ago. Michigan, Illinois, Wisconsin, Minnesota and Pennsylvania elected a Democratic governor. The Midwest is dear to the hearts of Americans. They call it their heartland with special affection. Prolonged negotiations between Japan and the US would affect the prospects of Trump being reelected.

In a sense, no other negotiations will be easier than the upcoming negotiations between Japan and the US. Japan's Minister of Economic Revitalization Toshimitsu Motegi might as well offer words of consolation to his counterpart, US Trade Representative Robert Lighthizer, saying "you must have been having a hard time."

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on November 8, 2018.)