Media  Global Economy  2019.01.21

Japan outpositions the US in bilateral trade pact talks - Japan should not back down. Protracted talks will hurt the US.

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

US demands on Japan revealed

The US Trade Representative (USTR) has recently announced specific negotiating objectives in the Japan-US trade agreement negotiations.

Agricultural produce and autos

USTR says that US demands on agricultural produce will include lowering tariffs for greater market access for US products. According to USTR, the US demands on autos will include redressing non-tariff barriers and introducing measures that will result in more auto production and employment in the US. For the former, the US has been maintaining that non-tariff barriers are behind the small share of American autos in the Japanese market. For the latter, the US wants the Japanese auto industry to increase investment in the US.

Provisions on currency and non-market economies

USTR also calls for provisions that prohibit each country from manipulating its currency so as to lower its value (a weaker yen for Japan) to improve the competitiveness of its industries, as well as provisions that discourage each country from concluding free trade agreements (FTA) with non-market economies (China to be specific). These two kinds of provisions have been incorporated into the United States-Mexico-Canada Agreement (USMCA), the revamped North American Free Trade Agreement (NAFTA), as demanded by Washington.

Currency manipulation provisions were originally demanded by Democrats who advocated for trade protections, as well as by US auto and other industries whose international competitiveness is declining.

The USMCA's provisions on non-market economies state that if a USMCA party concludes an FTA with a non-market economy, the other parties can leave the agreement. In specific terms, if Canada or Mexico signs an FTA with China, the US can leave the USMCA so that Canada or Mexico will no longer enjoy preferable access to the US market.

The prospect of limited access to the US market will deter Canada and Mexico from entering into an FTA with China. This is a kind of threat.

These two kinds of provisions are hard to swallow for Tokyo. What is the take of Tokyo negotiators on this? The following paragraphs describe what I think Japanese negotiators might be thinking:

The logic of Tokyo negotiators

Political difficulties involving agricultural produce

As far as agricultural produce is concerned, the Japanese government cannot make further concessions than it did during the TPP negotiations.

The Japan Agricultural Cooperatives (JA) Group, the most powerful pressure group in postwar Japan, is stepping up its opposition to the Abe administration, which carried out the reform of the group. The Japan Agricultural News, the JA Group's newspaper, maintains that Japan cannot tolerate any further concessions than what has been agreed to in the TPP. The ruling Liberal Democratic Party (LDP) does not want to lose the JA's important block votes heading into the Upper House election this summer.

Onerous auto issues

The issues surrounding automobiles are more onerous.

The primary issue is tariffs. What has been agreed to in the USMCA provides a specific clue as to what Washington might demand with regard to Japanese auto industry exports to the US. Washington will likely allow auto exports on a "low tariff" as long as they are within a certain level. If auto exports exceed that level, Washington will impose a "high tariff." The Japanese media brands this arrangement as a quantitative import restriction. However, this arrangement does not go against WTO rules per se. It constitutes a safeguard measure (known as a "snapback measure" in the US) or a tariff rate quota (TRQ). In fact, the Japanese government often resorts to this arrangement in its trade policy on agricultural produce.

The question here is what it meant by "low tariff" and "high tariff."

The US applies an ordinary tariff of 2.5 percent to automobiles from economies with which it has not signed an FTA--the bound rate it has committed to in the WTO. Logically, it seems, the US would concede a tariff of 0 percent or less than 2.5 percent to an auto exporting country once it concludes an FTA with that country. The logical conclusion would be that the low and high tariffs denote 0 percent and 2.5 percent, respectively.

It may be worth noting here that while Japan applies an ordinary beef tariff of 38.5 percent under its beef import system, it will apply the WTO bound tariff of 50 percent if beef imports were to increase by more than 17 percent from the same period a year earlier.

The auto tariff of 0-2.5 percent would make it easier for the Japanese auto industry to export their products to the US. That would go against the US goal of negotiations, i.e., to protect and increase domestic production and employment.

In the TPP negotiations, the Obama administration persuaded Tokyo to agree that the tariff of 2.5 percent will be reduced to zero over a long period of 25 years. It seems that the Trump administration wants to set the low tariff at 2.5 percent and the high tariff at 25 percent in the name of national security.

This contradicts the goal of an FTA, i.e., to make trade more free. Restricting trade is inappropriate. Moreover, raising auto tariffs in the name of national security violates WTO rules. This is something Tokyo could not possibly tolerate or agree to.

Apart from tariffs, Washington maintains that US automobiles do not sell well in Japan because of non-tariff barriers. This criticism is widely off the mark. European cars sell well in Japan. American cars do not sell well in Japan simply because they are unpopular in this country. American cars are rarely seen in Southeast Asian countries as well.

Yet Americans are convinced that Japan is to blame. They demand relaxing regulations. But Japan cannot abolish the regulations it has established for safety reasons just to make American cars sell well here. They just do not understand. When will they ever learn?

General Motors, whose competitiveness has dwindled after the US government raised tariffs on steel and other materials, is now planning to close some of their plants in the US and thus reduce its production and lay off workers. Under these circumstances, Tokyo cannot possibly cajole Japanese manufacturers into expanding their operations in the US.

This is something that should be left to individual companies to decide; it is not something the government should intervene in. Conceding to such a demand would draw Japan into an era similar to that of Japan-US trade frictions between the 1980s and the 1990s--a period when keiretsu (interlocking business ties) among Japanese businesses was rapped, and when the Japanese government was forced to commit itself to increase the share of foreign-made semiconductors in the domestic market.

Problems with the provisions on currency and non-market economies

Currency provisions would bind Japan's monetary and macroeconomic policies. It should be noted that the US once disallowed such provisions. Under the Obama administration, the Department of the Treasury and other government agencies rejected Democrats' demand that currency provisions be discussed in TPP negotiations.

Also, the USMCA's provisions on non-market economies are harmful to Japan for three reasons. First, they would make it impossible for Japan to draw China into the TPP so as to impose high-level rules that have been agreed upon in the TPP, including a ban on demands for technology transfer, a high-level protection of intellectual property rights, and regulations on state-owned enterprises. In fact, doing so is already impossible since Canada and Mexico are both parties to the TPP.

Second, provisions on non-market economies would also restrain Japan from entering into negotiations for an FTA between Japan, China, and South Korea, or for a Regional Comprehensive Economic Partnership (RCEP) in East Asia, which would involve Japan, China, South Korea, India, Australia, New Zealand, and ASEAN countries. Third, such provisions would strain Japan-China relations politically.

Japan needs not conclude Japan-US negotiations

These are all conundrums, and Japan cannot afford to ignore them since they are demanded by the US. If you were a Japanese government negotiator, what negotiating policy would you come up with?

Rather than racking your brain on specific issues, you should go back to the starting point of negotiations and build a negotiation policy based on three pillars.

The first and most important pillar is that bilateral negotiations are not something that Japan desires or that favors Japan.

Bilateral negotiations are what Trump demanded in a bid to win major concessions from Japan. Japan, on the other hand, called on the US to return to the TPP for fear that Japan will be pressured into making more concessions than what it agreed to in the TPP in regard to agricultural produce. For Japan, it is better to do without a bilateral deal (FTA). Unlike Canada or Mexico, Japan faces little difficulty in exporting its products to the US market under the current arrangements. Without an FTA, Japan can continue to do so. Returning to the TPP must be a preferable option for the US as well. It will turn the TPP into a mega free trade zone China could not help but join, which in turn would allow the US to impose high-level rules on China in such aspects as intellectual property rights.

In short, Japan does not need to conclude such negotiations. If the US claims that its agricultural produce is treated unfairly in the Japanese market, it should just rejoin the TPP.

The more protracted negotiations are, the more US agricultural produce would be forced out of the Japanese market

The second pillar is that all must be on the negotiating table and agreed upon as a package. No deal must not be signed unless everything is agreed upon.

The Japanese and US governments are set to enter into negotiations for an FTA (free trade agreement) or what Tokyo dubs a TAG (trade agreement on goods). Such an agreement is aimed at reducing the tariffs of the party countries below the levels that they have agreed to under the WTO. In the context of GATT/WTO, it is clearly an FTA as an exception to the most-favored-nation principle in Article I of GATT. Dubbing it a TAG is nothing but sophistry designed to paper over Tokyo's false insistence that it will not enter into bilateral FTA negotiations with the US.

The broader, fundamental issue is that despite its stated commitment to seeking a multilateral agreement like the TPP with less trade distortion, the Abe administration yielded to pressure from Trump and agreed to hold bilateral negotiations. Japanese opposition parties and the media solely criticized the Abe administration's misrepresentation of an FTA as a TAG. I just do not understand why they cannot see the forest for the trees.

In any case, the upcoming negotiations undoubtedly concern an FTA in the GATT/WTO sense. Accordingly, the parties to an FTA must adhere to the rule in Article XXIV paragraph 8 of GATT that the tariffs on "substantially all the trade" must be eliminated. No matter how the US wants to agree on agricultural tariffs as a matter of priority, such an agreement cannot be described as an FTA--which must cover "substantially all the trade"--unless it embraces all goods, including autos.

The harder Washington is on Tokyo with regard to autos and currency provisions, the more protracted the negotiations will become. That, in turn, would mean that Australia, Canada, EU countries, and other agricultural produce exporters with easier access to the Japanese market under the TPP and the Japan-EU FTA, would drive US agricultural produce out of Japan.

A "morbid fear of the US" is the problem

The third and final pillar, which is closely related to the first and second ones, is that Japan is in a far better position to negotiate with the US.

Protracted negotiations will put Trump in trouble, as they will affect US agriculture. Trump will not be reelected unless he wins in the Midwest--which overlaps the Rust Belt and the Corn Belt--as well as in Florida, Ohio, and other swing states. Trump will be doomed if he fails to win farmers' votes in the Corn Belt.

By contrast, Japan can afford not to conclude trade negotiations with the US. Tokyo should simply tell Washington to return to the TPP if it wants farmers' votes in the Midwest.

Canada and Mexico had to accept the provisions on currency and non-market economies in the USMCA because they had no other choice but to conclude an FTA with the US. This is not the case with Japan. Since Japan can continue to export without signing an FTA with the US, it does not need to accept non-market economy provisions like the ones in the USMCA.

In short, Japan is in a better position unlike Canada or Mexico. The logic or cause and the international community are on Japan's side as well.

The question is whether Japanese negotiators have the guts to negotiate with this firmly in mind. I hope that they are not poisoned by a "morbid fear of the US" or the "America First" notion that puts Japan-US relations before anything else.

The ultimate question may be how much Shinzo can assert himself vis-á-vis Donald.

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